If The Economy’s So Red Hot, Why Does The Housing Market Appear To Be Cooling Off?
Are The Economic Chickens Finally Coming Home To Roost? Or Is It Something Deeper?
We will start by admitting one month’s worth of numbers on the notoriously volatile number of new home starts does not a trend make. And on the surface of it, things still look great: residential housing starts rose nearly 10% in August, the biggest jump in 3 months.
But dig a little deeper into the Commerce Department’s numbers and you’ll find a couple of things that — if they continue — are definite causes for concern:
- First, nearly the entire increase last month was in multi-family dwellings. Single family homes were nearly flat. But multifamily home starts were up almost 30%. Aside from high-end condos for the super-rich, that mostly means rental properties. Why is that a problem? We’ll get to that in a second.
- Secondly, the number of new home permits — so that’s an indication of future building — actually fell, down nearly 6% to their slowest pace in well over a year. And the sharpest decline was in permits for single family homes.
So why would that be happening at a time when unemployment is at near-record lows? There are several very glaring things that would explain it. Some are very benign. Others, if they continue, would reveal an ugly flip side to some of Trump’s economic policies:
- Prices are too high. Developers and resellers see how frothy the economy is and they jack up prices for homes. If they raise them too much, that shuts buyers out. This happens from time to time, and over time the market usually adjusts until prices come back down to where people can afford to start buying again, or buyers’ wages catch up to the properties they want to buy. If that’s all that’s depressing building right now, it’s probably temporary and not that big a deal.
- Interest rates are up. That literally means dollars are more expensive, because it costs more to borrow them. And that means if you’re looking to buy a home, your mortgage payments will be higher than they would’ve been a year ago. And most economists expect them to go higher still. Still, interest rates are still pretty low by historical standards, so this alone wouldn’t explain it.
- The cost of building materials is increasingly unpredictable. It’s hard to commit to building something in the future if you’re not sure you’re going to be able to get the materials you want, at the price you expect. Trump running around implementing trade tariffs on half of all the goods imported from China, and making near-daily threats against Canada and Europe (and China again!) contribute to this uncertainty.
- The Trump/Republican tax bill passed late last year took away many deductions and credits from individual homeowners. It especially slammed families in high-tax, high-income states with high real estate prices. At the same time, it gave new tax benefits to real estate developers and landlords. So there’s not as much value in buying a single family home, but there’s much more value now in being a landlord and building units to rent out. Which might at least partly explain why the number of single family homes being built isn’t going up much, and instead most of the growth is in rentals.
And that leads us to potentially a much bigger issue, and one that could dramatically reshape American society for years to come. (And again, there’s no way to know from one month’s worth of numbers, but it’s something worth keeping an eye on.)
Since the end of World War II at least, the federal government — regardless of whether there was a Democratic or Republican administration — has always promoted home ownership, and has always enacted policies to help Americans own their own homes, if they could. Not anymore…
When Trump and Republicans proposed the new tax bill late last year, it represented a huge disruption from that tradition. As we said at the time: “some provisions rip at the fabric of America.” What we meant by that is the federal government decided for the first time in modern history to adopt tax policies that discourage home ownership. Because that bill (now law) gives tax breaks to corporations (and as we said, real estate developers and landlords) and takes them away from individual homeowners.
So a first time home buyer who’s finding houses to be unaffordable right now might continue to be shut out for a long, long time, since they’ve lost a lot of the support from the federal government their parents would’ve had to help them make it work.
With that in mind, we wonder if these latest numbers (if they’re evidence of anything) show a hidden temporary weakness in the economy, or a more momentous shift from a country that prided itself on its families owning their own homes to a one made up of landlords and their renters…