The last time the housing market suffered a major crisis in 2006, it took the entire US economy by storm. But the story never follows exactly the same script twice.
Undoubtedly, the weakening of the housing market will affect the economy. Construction of single-family homes fell at an annual rate of 1 million in May from a 15-year high of 1.31 million in December. Permits to build more homes also fell.
It will probably get worse too.
House prices had already risen to an all-time high when the Federal Reserve in March began to raise interest rates rapidly to combat high inflation. The central bank’s aggressive action pushed the 30-year fixed mortgage by more than 6% from just 2.75% last fall.
The combination of more expensive mortgages and very high prices has made it difficult for most buyers to buy a home. Affordability has fallen to its lowest level in 16 years, the National Association of Realtors said.
As housing goes, so does the U.S. economy, according to an old saying. The slowdown in construction will reduce much of the growth in gross domestic product during the second quarter. And fewer sales means fewer new homeowners are spending money on furnishing their homes.
However, the housing market is very different now than it was in 2006 and, in itself, is unlikely to lead the economy to a ditch. Economists say the United States may go into recession for a year or two, but housing will not be the main cause.
“We expect sales to decline further in the coming months, but we don’t expect the collapse of the 2000s to repeat,” said Alex Pelle, a US economist at Mizuho Securities.
Small bubble sign
Today’s housing market bears little resemblance to that of the 2000’s.
On the one hand, the typical buyer has a high credit score and is less likely to default. Only about 2% of all new mortgages are granted to so-called subprime buyers, or those with lower credit scores.
By contrast, 15% of borrowers had subprime lending at the height of the housing bubble nearly two decades ago, according to a survey by Wall Street firm Jefferies.
Many of these borrowers lost their homes during the 2007-2009 recession, and real estate values plummeted, robbing millions of Americans of their paper wealth and making them feel poorer. A massive sale of the stock market added to his problems.
The negative “wealth effect” contributed to a sharp decline in consumer spending that deepened the recession. Consumers account for almost 70% of everything that happens in the economy.
The current slowdown in housing, however, is unlikely to lead to falling house prices or values.
For starters, the United States has suffered from a housing shortage for years, although the number of new families being formed has pushed demand to new levels. The pandemic has also drastically increased the number of people working from home and the demand for more housing.
Demand for housing is strong in part “due to rising distance work and lifestyle changes,” said chief economist Bill Adams of Comerica Bank.
The builder has tried to meet most of this demand. Construction of new homes and rental units rose at an annual rate of 1.8 million in April, a 16-year high, before higher mortgage rates actually arrived. But this is still below a record 2.2 million in early 2006, when the population was 11% smaller.
It won’t get any better either. Construction fell sharply in May and is likely to continue to slow, further reducing the supply of homes for sale and keeping upward pressure on prices.
High home prices are not all bad, but especially for those who already have their own home. Stable housing values can partially isolate the economy from recession.
How is it? Homeowners are likely to feel better financially than in 2006 because their main nest egg is still appreciating.
In addition, millions of homeowners took advantage of lower interest rates during the pandemic to refinance and save a package. Most of them also opted for fixed mortgages, leaving them immune to rising rates.
This was not the case in the mid-2000s, when half of all mortgages were adjustable. Rising interest rates are forcing millions of homeowners to pay high monthly mortgage expenses and many who could not afford to do so are in default.
Now only 10% of all mortgages are adjustable. In addition, the percentage of income that homeowners have to spend on their mortgages is at an all-time low.
“The link between housing and consumption is likely to be weaker than in the past,” said Aneta Markowska, chief economist at Jefferies.
What could affect the housing market the most is a huge rise in unemployment that is causing more people to die.
However, with the unemployment rate of only 3.6% and a labor shortage that is expected to persist for years, some economists question whether companies will resort to mass layoffs if the United States enters recession. .
Meanwhile, the housing market continues to hold up relatively well despite rising interest rates and high prices. New construction sales and spending are approaching pre – pandemic levels, suggesting that the fund will not go down as it did in 2006.
Of course, some experts said the same thing 15 years ago. “Researchers say the recent collapse of housing does not necessarily mean an end to economic growth,” an article in The Christian Science Monitor said at the time.
What followed was the worst recession in decades.