Real estate and construction are considered bellwethers of the overall economy. Recently they’re not looking good – and this isn’t an isolated issue. It’s a warning sign of a crisis that could ripple through the entire economy…
The housing market is a massive portion (about 1/6th!) of the entire U.S. economy. About two-thirds of American families own their home – and for most, it’s their single biggest financial asset (as well as where they sleep). Home equity represents a tremendous share of household net worth – about half for the typical family! More of our national wealth is tied up in housing than any other single asset class.
So any unusual or unexpected developments in the real estate market get attention. Because they’re extremely important for the majority of Americans – far more important than abstractions like GDP or unemployment.
That makes recent updates on the state of the housing market concerning…
Housing affordability is near record lows
I don’t want to be the bearer of bad news, but it’s important that you know the truth of the situation. Today, the typical American family cannot afford a typical home. From an article at MoneyTalkNews:
As housing prices continue to climb, a startling 70% of U.S. households now find themselves unable to afford a home at the median price point of approximately $400,000, according to the National Association of Realtors.
That’s over two-thirds of U.S. households that can’t afford homes smack in the middle of the price range. We aren’t talking about McMansions here, we’re talking about what we used to call “starter homes,” much less expensive properties.
To give you a more solid grasp on those numbers:
About 94 million households simply can’t afford to purchase a median-priced home.
In fact, to afford “median-priced” homes in the U.S., the household income needs to be at least $110,000 per year. To afford a home that is less than half of the median price requires a household income of about $61,000.
Many Americans simply aren’t making that kind of money, not even on a household basis. Worse still, it takes significantly longer for a family to save up enough for a downpayment.
For comparison purposes:
1970-1985: The typical family could save 10% of their income for five years and accumulate a 20% downpayment
2023: The typical family saving 10% of their income will need eight years to collect a 20% downpayment
Note that those numbers are incredibly variable based on location (isn’t everything in real estate?) The average family cursed to live in New York City will need 19 years to save up a downpayment, where some Midwestern cities like Tulsa are much more affordable (4-5 years).
Affordability is a major challenge right now. It’s a stark reminder of how many people are struggling financially. Especially after several years of brutal inflation – and, of course, inflation’s impact on home prices.
And what happens when prices rise faster than our ability to pay? Supply starts to build up…
Homebuilders and realtors are facing recession
We know that is the case by just looking at the numbers.
In May, builders broke ground on new homes at the slowest pace in five years
Building permits issuance also hit a five-year low
In June, sentiment among homebuilders dropped to the lowest level since the pandemic lockdowns!
Mike Shedlock has the statistics about how the decreased numbers of new homes that builders are starting:
Total: -19.6% from September 2022
Multifamily: -25.8% from August 2023
Single Family: -24.9% from June 2022
To put that into perspective, nearly one in five homes that were being built… aren’t. Not anymore.
When families can’t afford to buy a home anymore, supply backs up. Prices fall. Profitability for the major homebuilding firms becomes a real concern.
Why did prices surge? I mentioned the pandemic-era inflation earlier – that’s a major factor. But far from the only factor:
7% mortgage rates are less affordable than the pre-pandemic 3% rates
Low consumer sentiment means families are less likely to spend their money
The global dedollarization drive means foreign investors are less likely to lend to American mortgage companies
Tariffs could add as much as 9.3% to today’s too-high home prices
Anecdotally, fear of ICE raids have led to deserted construction sites (according to reports, some 20-50% of the construction workforce are illegal immigrants)
According to Brown, other factors impacting the housing market are “new Trump-era factors, including tariffs and deportations, that are holding back construction and limiting supply.”
To be fair, we can’t reasonably put the blame for the whole situation at Trump’s feet, but it’s pretty clear that we’re in the transition period that Trump talked about from failing economic policies of previous administrations to the economic upturn Trump promised us.
As he also promised, the transition is far from a smooth and painless one.
Homes, wages and purchasing power
Inflation alone (that is, destruction of the dollar’s purchasing power) wouldn’t be as severe an issue if household incomes kept up. Unfortunately, they haven’t – here are the less-than-encouraging details:
For decades, home price appreciation has been outstripping earnings growth. In the last 25 years, home values have more than tripled. The steepest climb came between 2020 and 2022, when pandemic moves and ultra-low mortgage rates spurred a buying frenzy across the country.
Meanwhile, median incomes from 2000 to 2023 did not quite double.
That’s why we’re seeing such an affordability gap.
Now, I’m the first to blame the Federal Reserve’s inflationary policies for economic issues like this. Unfortunately, the Fed’s current efforts to tame the inflation they created is hampering home sales, too!
In recent years, the housing market has been stalled by what’s known as the rate “lock-in effect.” Anyone lucky enough to have a sub-4% mortgage rate at a time when prevailing mortgage rates are closer to 7% is reluctant to give up that cheap rate in a move. That effect has kept for-sale inventory depressed.
It’s no wonder that home builders aren’t optimistic about the current home buying market. Between too-high prices and above-zero interest rates, homebuyers are caught between a rock and a hard place.
This is bigger than just the homebuilding sector, though. A depressed housing market is an early warning sign of a struggling economy. I’m not just speculating here, either. Remember the Great Financial Crisis of 2007-09?
More recent memory offers the Great Recession, a severe economic downturn that began with the collapse of the housing market in the United States. While not as prolonged or severe as the Great Depression, it still caused significant economic hardship, with unemployment rates reaching nearly 10%.
We watch the housing market for exactly this reason. It’s our canary in the coalmine of the American economy.
What we can do when the canary stops singing
Sure, it’s easy to fall into doom and gloom thinking when you see numbers like this. Some of my friends think I’m obsessed with bad news… But I’m really not. I do my best to point out the important economic stories you might not see on mainstream media, and to show you how and why these stories matter.
I encourage you to remember one thing: While we cannot make major changes to our nation’s economy, we can take control of our own personal economies.
Successful people have talked about this idea for years! Focus your attention on what you can change rather than worrying about what you can’t.
An imminent housing-led slide into recession may or may not be in the cards for us. If your savings are well diversified (especially if you’re a homeowner!), your overall financial stability can endure regardless of the booms and busts of the broad economy. One of the best choices for that kind of diversification, in my opinion, is physical precious metals. Like real estate, gold and silver are one of the few financial assets you can own outright!
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