Despite the fact that the constant growth of US GDP surpasses the economists’ prediction in the past few months, there has been a decreasing trend of U.S home sales since May 2018. Unlike in December 2017 where the home sales fall due to the limited supply of housing, the fall in home sales since May 2018 is mainly caused by the falling demand of housing. The U.S. central bank has increased the interest rate three times since 2018 from the previously 1.5% at the start of 2018 to currently 2.25%. The lifting interest rate has caused the mortgage rate to increase from 4.27 in January 2018 to 4.77 in September 2018 according to the National Associations of Realtors (NAR), which this decreases the affordability of housing and lowers the demand of the housing market. The fall in home sales has also reflected upon the decreasing growth rate of housing price; however, with the increasing interest rate, the affordability of housing still remains a problem to home buyers. The NAR has requested a revaluation on the monetary policy. A cyclical downturn of housing price could be a potential threat to the U.S economy as it affects the householders’ confidence to consume and discourages the home builder to increase the supply of housing.
Figure 1: University of Michigan’s Consumer Sentiment
Housing is most individual’s most valuable asset; therefore, the pricing of the house plays a significant role in the wealth effect. As house price falls, householders will be less confident to consume in the market. According to the University of Michigan’s Consumer Sentiment, there has been a correlation between the fall in growth rate of house price and the consumer’s confidence that dropped from 100.1 in September 2018 to 97.5 in November 2018 as shown on figure 1. In addition, with the growth rate of house price slowing down, this will prevent householder to take out a bigger mortgage or borrow more from the bank, which will result in less consumption in the nation. As 70 percent of the US GDP is contributed by individual consumption, decreasing confidence to spend could be a significant factor that hinder the growth of US’s economic.
Figure 2: Future Projection of Real Estate Market
Housing as a GDP Indicator
The real estate market is not the only victim of falling demand in housing. Moreover, purchasing house comes with other many necessary purchases of complementary goods such as furniture, gardening supplies, and kitchen tools. Therefore, a weakening housing sector would affect multiple industries in the nation. More importantly, all these falling demand will lessen the consumption sector of U.S GDP. With the falling demand of housing and the on-going trade war of steel, these factors have discouraged homebuilder to increase the supply of housing. The falling in supply and demand of housing will decrease the quantity of housing sold in the nation from Q1 to Q2 illustrated on figure 2 and negatively impact the U.S. future economic growth.
However, there is an increasing trend of renting in the modern day. Fall in house price will decrease the price of renting as well; therefore, this creates an extra disposable income for the renter to spend. With renting becoming a more common option, the falling house price may be less impactful as what has happened in the past.
Future Interest Rate
After raising the interest rate three times in 2018, the Federal Reserve chairman Jay Powell suggested in October that “US interest rates remained ‘a long way’ from the neutral level for growth and inflation.” Despite the pressure from President Trump, the Fed is ready to increase the interest rate higher and it is far from its neutral level. Therefore, the affordability of housing still remains as a critical problem for home buyers even though there has been a slowing growth rate on housing price.
The 3.5% growth in US GDP is a positive sign to the U.S economy. One of the opportunity costs of this robust growth is the weakening sign of the real estate market. The home sales falling to its record low within the past two years suggests a sign of uncertainty and instability on the US economic growth. In addition, with the forecast of interest rate rising in the near future, there could be speculation of house price falling in order to respond to the falling demand and the affordability problem, and this will be a real challenge to overcome in order to continue on the economic growth.
Sources: Bloomberg, FT, CNBC, Trading Economics
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