Housing is a vital part of US economic performance. Not only do the housing market and affiliated industries represent about one-fifth of US economic activity, but, given that home ownership rates are high at 65%, mortgage rates are also a massive contributor to aggregate demand across the economy. The US economy is deeply dependent on the housing market.
And, indeed, what an impact the housing market has had on the broader US economy since the Covid-19 pandemic. Anecdotes abound, particularly regarding areas that have become fashionable to relocate to, such as Austin, Texas, or Miami Beach, Florida. Some report house prices up two if not three times in the past two years. The broader S&P CoreLogic Case Shiller House Price index, which tracks the value of single-family housing within the US, is up nearly 35% since February 2020.
As a result of this insatiable demand, new housing starts – which reflects the number of privately owned new houses on which construction has been started – has struggled to keep up with the market, but seems to be catching up.
Having averaged around one million new homes a year since the financial crisis, it has jumped to 1.8 million. Should demand not be sustained, this could risk turning into a rout. Are we therefore looking at the first US housing bubble since 2007, and, if so, is there any chance of preventing a recession in the US from becoming a protracted global economic slowdown?
Worryingly, Governor of the Federal Reserve Jay Powell seems singularly disinclined to worry about the implications of a crash in the housing sector.
The effect of his reincarnation as a monetary hawk has transmitted to the average long-term mortgage rate. The average 30-year mortgage rate has almost doubled in the past year from 2.8% to 5.5%, an all-time high.
The cost of home ownership (average mortgage interest rate multiplied by the average house price) has skyrocketed. Analysts at Goldman Sachs estimate that it has at least doubled, from $25,000 a year to at least $50,000. This means the cost of owning a house has jumped from 40% of average household income to more than 75%.
The implications of this are profound. First, there will be a massive effect on disposable income. Households that have been able to manage the pressures of meeting mortgage payments along with saving will now find themselves under tremendous pressure.
Taken with a four-decade-high inflation rate and it starts looking like a perfect storm for consumers.
Second, as higher rates put pressure on the demand for new homes, the house building motor of the US economy will go into reverse. As one of the biggest employers, residential construction is essential for maintaining broader economic momentum.
Already, there’s anecdotal evidence that homeowners are under pressure. In scenes reminiscent of The Big Short, the April homebuilder survey reported that demand is slowing because of entry-level payment shock, investors are pulling back, and the ripple effects of rising rates are starting to move up market. Next will be nonperforming loans starting to hit bank balance sheets.
It is impossible to predict how this will play out. The US consumer is still robust, with savings at reasonable levels. But the downside risks are profound.
It is hard to disagree with former CEO of Goldman Sachs Lloyd Blankfein’s comments this week that the “risks of a recession in the US are very, very high”. We can only hope that such a slowdown is relatively contained to the US and does not spread, as in 2007, to engulf the global economy and South Africa’s in particular. DM168
This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R25.