The U.S. economy is growing pretty vigorously right now—on Friday the government reported that gross domestic product expanded at a 3.5 percent annualized rate in the third quarter, meaning we just had the fastest six-month stretch of growth in four years. And yet, things feel a little uneasy. The Fed is hiking interest rates, to the chagrin of both investors and Donald Trump. The stock market is getting pummeled. People are making anxious noises about loans that could blow up.
Then there’s the housing market—which, as the kids might say, sort of seems to have been getting rekt lately. There have been trouble signs in the residential real estate market for months now. But this week gave of a double dose of confirmation that all is not well. On Thursday, the Census Bureau reported that new home sales had fallen for the fourth straight month in September, hitting the lowest point in almost two years. The median sales price was also down from one year ago. That news was followed by Friday’s GDP release, which showed residential investment shrank at a 4 percent annual pace last quarter; it has now contracted every quarter of this year.
There are a few different theories about why home sales are suddenly waning. One is that prices in markets like New York and California have simply risen so high that people are finally giving up on buying. But the simplest boils down to those rising interest rates (thanks, Jay). The average 30-year mortgage rate ticked up to 4.86 percent this week, according to Freddie Mac, up from 3.94 percent one year ago, and that’s almost certainly crunching sales as potential house hunters get priced out. Assuming rates continue to rise (the Fed does plan to keep hiking, after all) it could also discourage new construction in overly expensive markets that need more affordable units.
The Republican tax cuts may be playing a role, at least in some parts of the country. As Justin Fox points out at Bloomberg, new home sales have tanked worst in the Northeast, where they’re already down more than 16 percent year-to-date. (Nationwide, sales are still up slightly—3.5 percent—for the year, though given the way things have been trending that could certainly change by the end of December). Economists predicted that housing markets in New York and New Jersey would be hit especially hard by the tax legislation Trump signed last year, because it curtailed the state and local tax deduction that homeowners in those states benefited heavily from. Those forecasts seem to be panning out.
It’s hard to predict whether trouble in housing will put a damper on the wider economy any time soon. And even if it does, we almost certainly are not looking at anything remotely similar to the 2008 crisis, since home prices haven’t been inflated by wild, debt-fueled speculation and financial markets are not perched atop a combustible pile of trash mortgage-backed securities. But the recent sales declines certainly aren’t a good sign when it comes to the durability of the expansion the country has been enjoying. While purchases make up much less of the economy than they used to—residential investment is responsible for just under 4 percent of GDP, compared to a high of 6.7 percent before the Great Recession—they still play an outsized role in growth while driving sales of other large consumer goods, such as washing machines and kitchen appliances. Americans also tend to spend more when home prices are appreciating, and less when they’re falling, thanks to what are known as wealth effects. If you’re going to look for a long-term trouble spot in the economy at this moment, and a sign of how the Fed could end up cutting growth short by raising rates too quickly, keep your eye on the wobbly housing market.