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The U.S. housing market, grappling with elevated interest rates and sluggish sales, is poised to exert significant drag on the economy leading up to the upcoming election.
Recent reports paint a grim picture of a housing sector that once held promise as a substantial contributor to the economy, constituting up to 18 percent of it. Existing home sales have declined, and pending sales have plummeted to unprecedented lows. May’s housing starts have hit their lowest point since June 2020, coinciding with the pandemic-induced economic slowdown. Amid the highest borrowing costs seen in over two decades, residential investment has sharply decreased.
Lawrence Yun, chief economist at the National Association of Realtors, highlighted the severity of the situation, noting, “Home sales activity is at a 30-year low — it’s essentially stuck at that level, so all of the economic activity associated with home sales is at a depressed level.”
Initially optimistic at the start of the year, market expectations were for the Federal Reserve to begin cutting interest rates as inflation subsided. However, this expectation has not materialized, keeping the Fed’s rates elevated and thereby increasing the costs of construction and financing for home purchases.
Simultaneously, soaring home prices due to a nationwide supply shortage have barred many prospective first-time buyers from entering the market. Surveys indicate that the escalating housing costs rank among the top concerns for young voters, with over 90 percent identifying affordability as a pivotal factor influencing their voting decisions this year. This issue is not confined to the U.S. alone; other affluent democracies such as the U.K., France, and Canada are also contending with housing affordability as a pressing political issue.
The Biden administration has faced challenges in addressing this crisis, with significant barriers to new housing development predominantly arising at the local and state levels.
Daryl Fairweather, chief economist at Redfin, emphasized the unprecedented nature of the current housing dilemma, stating, “It’s unprecedented, it’s never been such an issue. I think this is the first time housing could actually matter in the swing states — before it was mostly in the coastal areas.” Fairweather underscored President Biden’s acknowledgment of housing costs in his debate with former President Trump, highlighting its newfound prominence in national discourse.
Residential investment, which accounts for a substantial portion of the GDP, could diminish by up to 5 percent as a result of declining spending in this sector, further exacerbating economic slowdown amidst already tepid consumer spending.
Although housing inventory is showing slight signs of increase, it remains insufficient to meet demand, exacerbated by a prolonged supply shortage dating back several years. This shortage is compounded by homeowners opting to retain their 3 percent mortgages secured in 2020 rather than refinancing at current rates nearing 6.9 percent, creating what Fairweather termed as a “mortgage rate lock-in effect.”
Fairweather cautioned against expecting a quick resolution to the housing market’s challenges, suggesting, “I don’t think that the problems with the housing market are going to clear up in a matter of years. It could take a decade.”
Acknowledging that many of the barriers driving up housing costs are localized, the White House announced initiatives in June. The Department of Housing and Urban Development plans to allocate $85 million in grants to help local governments identify and eliminate obstacles to affordable housing production and preservation. Additionally, Treasury Secretary Janet Yellen announced a $100 million allocation over three years to support affordable housing production through the Community Development Financial Institutions Fund.
These measures represent the latest attempts by the Biden administration to tackle the affordability crisis exacerbated by housing shortages following years of below-average construction rates in the aftermath of the global financial crisis. As of April, home prices in the 20 largest U.S. metro areas reached record highs according to the Case-Shiller home price index, contributing to increased official inflation indexes and raising concerns among voters already grappling with the highest inflation rates in four decades.
Despite the record highs in home prices, there are signs that the pace of price growth is moderating, suggesting a more stable market compared to the unsustainable growth observed in 2022, according to Zillow senior economist Orphe Divounguy. Divounguy noted, “Today I think we’re in a much better place than we were in 2022, when prices were growing unsustainably. That overheated pace could result in a crash, which is why the Fed had to act when it did.”
Looking forward, Divounguy predicted that mortgage rates would remain elevated for some time, attributing part of the problem to the role of high interest rates in driving up housing costs, as highlighted by Robert Dietz, chief economist for the National Association of Homebuilders. Dietz remarked, “You’ve got a market that’s got a lot of potential for growth that is continuing to lag due to higher-for-longer interest rates.”
Dietz emphasized the importance of addressing the housing supply issue, predicting that housing would be a critical issue in the upcoming 2024 election. He stated, “If pollsters and candidates are out there talking to people, they’ll hear pretty quickly that increasing the attainable housing supply is a must-do.” However, he cautioned against expecting a simple, scalable solution, acknowledging, “There’s kind of a lot of challenges that have to be addressed in the housing market.”
The U.S. housing market’s current challenges, compounded by elevated interest rates and persistent supply shortages, threaten to weigh heavily on the economy ahead of the election. Despite recent efforts by the Biden administration to address affordability through targeted initiatives, the complex nature of local barriers and entrenched economic factors suggest that resolving these issues will require sustained effort and innovative solutions.
