The housing market is a critical factor in determining the level of inflation as well as the resilience of the consumer. It represents 30% of the total US inflation, by far its largest component.
Not doing well but not 2008
Our housing “misery index” is near record, with prices high and mortgage rates rising. However, the housing market is not heading towards a crash like in 2008. eToro’s housing “misery index” is at multi-decade highs. This index is calculated by adding national housing price growth to the average mortgage rate.
Currently, US house pricing growth is plateauing at a whopping +20% year-over-year. A typical 30-year fixed mortgage rate has doubled off its 2021 low. In the UK, housing price growth has started to ease, to 11.8%, while a 5-year fixed mortgage rate has doubled from its low of 2021.
Housing is a major part of the economy
The housing sector represents around 17% of the US GDP. It is comprised of construction and remodelling costs at 5%, and housing services, which include rental payments at 12%. Although there is a housing slowdown, we are not headed for a 2008 style crash. Housing supply is lower now, consumer balance sheets better, and lending standards tighter.
A house is a person’s largest asset
A housing slowdown will dampen consumer confidence in the economy as well as consumer spending. The consumer drives 70% of US GDP, and housing is typically their largest asset at 25% of the total. This is larger than financial investments (20%), business interests (20%), or retirement accounts (15%). Country differences also matter. Home ownership ranges from 90%+ in eastern Europe, to 65% in the US and the UK, and down to 50% in Germany.
Housing value chain taking a beating
The housing “value chain” stretches across the stock market and it is suffering. Lumber prices are down 65% from 2022 peaks, with 90% of houses in the US built from timber wood. Homebuilder stocks (like DHI, LEN, PHM) are down 30% this year. Other impacted segments stretch from construction materials (VMC, MLM), to selling brokers (HOUS, RDFN), mortgage specialists (RKT, INTU), investors (EQR, NYMT), and more.
Since the housing market is a significant component in determining inflation, it is a segment of the economy that is critical to watch in the coming months as we look for indicators of whether inflation is rising or falling.