The U.S. housing market is flashing warning signs and some of Wall Street’s top economists are taking notice.
Jan Hatzius, Chief Economist at Goldman Sachs, is raising the alarm that residential investment which covers everything from building new homes to renovating existing ones is on track to drop by 8% annually in the second half of 2025. The culprits? Persistently high housing costs, a slowdown in immigration, and a labor market that may be starting to crack.
Hatzius points out that affordability pressures remain intense, with more homebuyers turning to mortgage rate buydowns to make monthly payments manageable. And with the possibility of stricter immigration enforcement under the Trump administration, he warns that fewer new households could be formed reducing housing demand even further.
Weak Housing, Weak Economy?
Hatzius isn’t alone in his concerns. Mark Zandi, Chief Economist at Moody’s, recently escalated his warning from a “yellow flare” to a “red flare” for the broader economy. His reasoning is simple: if mortgage rates currently hovering around 7% don’t drop meaningfully soon, sales, construction, and home prices could all decline together.
For Zandi, this isn’t just a problem for buyers and sellers. A cooling housing market can ripple across the economy slowing furniture and appliance sales, reducing demand for construction labor, and shaking consumer confidence.
“High rates are squeezing everyone from first-time buyers to retirees looking to downsize,” Zandi noted. “And unlike in past decades, when high rates were offset by cheaper home prices, today’s market offers no such relief.”
The Recession Connection
Economists have long considered housing to be one of the most reliable early indicators of a recession. When residential investment starts falling as it did before the 2008 financial crisis the slowdown often spills over into consumer spending and job creation.
Goldman Sachs’ latest forecast aligns with research from Citi and Pantheon Macroeconomics, which suggests that a prolonged drop in home prices could sap enough consumer demand to tip the economy into recession.
This isn’t just theoretical. History shows that once the housing sector loses momentum, related industries from construction to real estate services can see rapid declines. And when fewer homes are being built or sold, fewer buyers are purchasing all the goods that come with a move: appliances, furniture, paint, and more.
Looking Ahead
With housing activity already slowing and mortgage rates expected to stay elevated into 2026, many economists believe the sector could become a “full-blown headwind” for U.S. growth in the coming year.
The Federal Reserve’s next moves and whether rates can meaningfully come down may be key to avoiding a deeper downturn. But as of now, the data is sending a clear message: the housing market is losing steam, and history suggests the broader economy could be next. For direct financing consultations or mortgage options for you visit 👉 Nadlan Capital Group.
