US housing market slowdown waves red flag for the economy

Housing investment and
sales have been falling for months.
Robert Galbraith/Reuters

• Friday’s gross domestic product (GDP) report showed
  that residential investment, which includes construction and
  brokers’ fees, fell for a third quarter out of four.
• It was another confirmation that the US housing market
  is in a slowdown. 
• Sales of luxury and affordable housing have been
  declining for months.
• There’s plenty of demand for buying houses, but it’s
  getting harder to do so successfully in America. 

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The US housing market is slowing down.

Friday’s report on US economic growth spurred a
presidential victory lap, after it showed that
gross domestic product (GDP) rose at a 4.1% annual rate
— the fastest in nearly four years.

However, it had an ugly detail about the housing market that
added to evidence of a slump: residential investment, which
includes construction and brokers’ fees, shrank in Q2 for a third
quarter out of four.

Add this to the
worst housing affordability in nearly a decade and rising
mortgage rates, and you have the recipe for a slowdown.

For Lindsey Piegza, chief economist for Stifel, the housing
market “raises a large red flag” about economic growth in the
second half of the year. She added that home sales help
drive other parts of the economy, including consumer confidence
and the pace of construction.

“It’s very hard to escape the
conclusion that the market has peaked for this
cycle, given the rise in mortgage rates since
last fall and the gradual tightening of lending
standards,” Ian Shepherdson, the chief economist at Pantheon
Macroeconomics, said in a recent note.

Buyer fatigue

Buyer fatigue is building, even though a strong jobs market and
the maturing of millennials means there’s plenty of demand for
houses. 

Evidence of this fatigue came last week in several sales reports.

Existing-home sales, which make up about 90% of the market,
fell for a third straight month in June to an annual pace of 5.38
million units, according to the National Association of Realtors.
And, new residential construction, or housing
starts, softened in June to a 1.17 million-unit annual rate,
according to the Census Bureau. In March, starts were at a 1.33
million annual rate.

Economists often caution against drawing broad conclusions from
monthly housing data because they’re volatile and often
revised. 

But for a number of months now, the trend of many key indicators
has been downwards. 

“We have officially arrived at a moment in housing nationwide,”
writes Jonathan Miller, CEO of real estate appraiser Miller
Samuel, in a
newsletter.  

He said sales in both the high and low end of housing are slowing
for different reasons. Luxury home sales in major markets
including Manhattan, Los Angeles, and the Hamptons have cooled
amid uncertainty about the
impact of the new tax law.

At the cheaper end, the market has “crossed an affordability
threshold” after many years of rising prices, low inventory, slow
wage growth, and now, rising mortgage rates, Samuel said. 

What these four ingredients in this recipe for a housing slowdown
are not telling us, however, is that
Americans don’t see housing as a good investment. 

But they’re showing it’s getting harder to buy a home, and fewer
Americans are succeeding at it.  

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