A spoke in the wheel of the US economy
It has rarely been so difficult for US households to purchase a property. Indices measuring access to property – of course imperfect as they mask differences between regions, age groups and income levels – have nonetheless recently fallen to levels even lower than during the peak of the real estate bubble in the mid-2000s. Whilst this parallel may appear alarming, the two situations are far from comparable. In the first half of the 2000s, accelerated growth of subprime mortgages opened up access to property ownership to many households that had previously been excluded, primarily due to insufficient income levels. This of course resulted in a rapid rise in demand, with the knock-on effect of a sharp rise in prices and the formation of a bubble. This bubble finally burst in 2007, as an increasing number of households were unable to repay their loans against the backdrop of an economic slowdown and rising unemployment.
The current situation is very different. The main impediment to access to property ownership is the very rapid rise in borrowing rates. The 30-year benchmark rate has moved from just over 3.0% in mid-2021 to more than 7% today, even briefly topping 8% last autumn. At the same time, prices have increased – although there is no real bubble – due to changes in lifestyle and working practices linked to the pandemic, and to a shortfall in housing available to purchase.
This latter issue is in the process of changing. Admittedly, although the existing housing stock is rising, it remains at a very low level and is completely frozen: those who have purchased in recent years do not want to lose the advantage of the very low interest rates obtained in 2020 and 2021, and this is keeping prices at artificially high levels. On the other hand, stocks of new housing continue to rise and in May 2024 reached their highest level since January 2008. Symbolically, the median price for new housing – which had been stable for a year – has fallen below the median price for existing housing for the first time since mid-2005 (with the exception of the COVID period).
This environment, although far from healthy, is much less risky than in the 2000s and will most likely unwind as rates start to fall, but not without a corresponding and significant downwards adjustment to prices. And this is the major risk that the real estate market poses for the US economy today. Indeed, the growth in real estate prices in recent years has been one of the primary elements fuelling the “wealth effect”, which has been a powerful driver of household consumption, which has in turn provided broad support for US growth. A fall in real estate prices – in principle, logical and necessary in order to rebalance the supply/demand situation – will, by the same ripple effect, certainly have a negative impact on household spending and therefore on US economic momentum.
This is far from insignificant at a time when US growth is starting to slow, with GDP rising only 1.4% on an annualised basis in the first quarter and consumption regularly showing signs of weakness. From a macroeconomic perspective, this is reflected in disappointing retail sales figures recently and the modest contribution of private consumption to growth in Q1 GDP – less than half that of the two previous quarters. It can also be seen from a microeconomic perspective in the latest subdued quarterly results of many consumer companies, such as the weak numbers published by Walgreens a few days ago. The group, which runs one of the largest drugstore chains in the US, announced results that were slightly below forecasts. More importantly, it significantly downgraded its outlook for the coming quarters, specifically blaming greater weakness than expected in US consumption.
The present never fully replicates the past and the real estate sector is no longer the systemic risk that it represented prior to the 2008 crisis. For all that, once again, it may well be one of the primary factors determining the future course of the US economy.
Final version of 28 June 2024 – Enguerrand Artaz, Fund Manager, LFDE