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Housing Is Taking It On The Chin

Housing

With the rate increases the housing market and pricing are just taking a beating, this may spread as people begin to realize their net worth is dropping.

The new GDP numbers are out, and one striking thing to draw from them is this: The housing sector is overwhelmingly bearing the brunt of the Federal Reserve’s efforts to slow down the economy, especially with mortgage rates topping 7%.

In effect, the economic pain being wrought in order to reduce inflation is concentrated, to a remarkable degree, in a single sector.

Why it matters: The Fed’s rate hike campaign is succeeding at slowing the overall economy, but the burden disproportionately falls on those trying to buy, sell or build houses. That makes the policies less effective at bringing down inflation than they might be if the impact were wider.

Driving the news: Third-quarter growth rose at a 2.6% annual rate, the Commerce Department said, due to a narrowing trade deficit and steady growth in consumer spending.

That reversed two consecutive quarters of contraction in the first half of the year, though the report’s details clearly point to an economy that has slowed over the course of 2022.

For example, final sales to private domestic purchasers — an indicator of underlying trend growth — rose at only a 0.1% rate in Q3, falling from 2.1% in Q1 and 0.5% in Q2.

But to us, the numbers on residential investment really stand out. The sector contracted at a 26.4% annual rate in Q3, subtracting more from GDP than it has since 2007.

How bad is that? Residential investment pulled more from total growth (1.37 percentage points) than consumption spending added (0.97 points). Yet residential investment is only about 4% of the total economy while personal consumption is 68%.

The 26.4% rate of contraction in the sector is nearly as bad as during the height of the pandemic (-27.4% in Q2 2020) and the global financial crisis (-33.6% in Q4 2008).

Axios Macro By Neil Irwin and Courtenay Brown · Oct 27, 2022

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