The other economic hazard from housing

 The other economic hazard from housing

Housing likely had a role in boosting economic growth in the third quarter, according to the gross domestic product data released by the Commerce Department on Thursday. That shouldn't obscure the fact that the housing market is in an absolutely terrible situation right now, and the economy is suffering as a result.

The National Association of Realtors said on Thursday that a seasonally adjusted annual pace of 3.96 million existing or previously owned houses were sold in September. That was less than the 4.68 million recorded a year earlier and much fewer than the numbers that immediately followed the outbreak. It is a sign of the rapidly rising mortgage rates, which have made buying a house much more difficult while also making homeowners unwilling to sell since doing so would require them to finance the purchase of their next home at rates far higher than they are already paying. According to the data, there were just 1.13 million properties for sale in September, which is the lowest number ever.

Even worse, existing house transactions are only recorded when they close rather than when they enter into contract. As a result, even though government-controlled mortgage giant Freddie Mac reported that the rate on a 30-year fixed mortgage was 7.2% in September, it is likely that the majority of the financing for September's sales was obtained while mortgage rates were still below 7%. Existing house sales are likely to continue declining, with Freddie Mac reporting that mortgage rates averaged 7.63% in the week ending on Wednesday.

Existing house sales don't have much of a direct impact on GDP, however. Broker commissions on sales are taken into account by the Commerce Department in its calculations, but they pale in contrast to the revenue earned by the construction and sale of new residences. And, rather paradoxically, high rates have supported the selling of new houses since the exceptionally low supply of existing homes has led some buyers to choose to purchase new ones. As a consequence, it seems as if the residential investment portion of GDP resumed expanding last quarter. According to the GDP tracking model of the Federal Reserve Bank of Atlanta, increases in residential investment increased third-quarter annualized growth by 0.2 percentage points after accounting for inflation.

A simplistic analysis of this dynamic would come to the conclusion that although housing increased GDP in the third quarter, it is really less susceptible to rises in interest rates than in the past. The conclusion could be that in order to successfully restrain the economy, mortgage rates will need to rise much more. However, the fact that current homeowners are essentially trapped into their houses because of high rates, limited availability, and poor affordability isn't helping the economy. Rather, it harms its possibilities.

Homeowners who are hesitant to relocate because it would be pricey in many circumstances may be passing up possibilities. For instance, someone can decline that desirable position in another state instead than settling for a lesser pay and dwindling career opportunities. And this isn't just terrible for them; it's also bad for the economy since, in the end, moving to a position where one can optimize their well-being and economic contributions leads to GDP growing more swiftly.

Furthermore, it is detrimental that first-time homebuyers are priced out of the market. Housing affordability reached its lowest levels in August since 1985, according to the National Association of Realtors' affordability index, which is based on mortgage rates, family incomes, and current single-family house prices. Homes are undoubtedly much less affordable today because of rising mortgage rates.

Lower rates would benefit the housing market by releasing inventory and increasing house affordability, but they wouldn't be a panacea. Costs are another issue. They have far outpaced inflation, particularly since the epidemic began. A property purchased for $115,000 in 1995, when mortgage rates were about where they are now, would be worth around $230,000 today if the price had increased in tandem with consumer prices. However, it most likely sells for more over $400,000.

Affordable housing will likely continue to be a challenge, and can only be addressed if American earnings increase more quickly than house values. National home prices don't often decrease by much, but the housing crash that contributed to the 2008 financial crisis was something of an exception. If it does occur, the procedure will presumably take many years. Housing will be an issue for the economy up to that point.