Skyrocketing mortgage rates and astronomical house prices make it almost impossible for the average American to buy a house. So activity declines. The result is a drag on growth.
The US 30-year mortgage rate, while falling slightly, is still close to its highest level in more than 23 years. Nevertheless, house prices have risen to record highs after a brief dip. This is only nice if you own a house, because otherwise it is an unfavourable combination economically.
The chart below shows the US Housing Affordability Index falling to its lowest level ever. And with the aforementioned combination of mortgage rates and prices, this is obviously no surprise. It is the continued scarcity of available houses that is keeping prices from coming down, even though buying a house is hugely expensive due to high interest rates.
Partly because of this scarcity, activity in the housing market is declining. And with the real estate sector being one of the biggest industries, this is going to hurt economically. To give an example, sales of existing homes fell to 3.79 million year-on-year in October, the lowest number since 2010.
It seems too premature to conclude that now that interest rates have fallen a bit, the US housing market is ‘out of the woods’. And this is mainly about the impact on GDP growth.
Incidentally, things are not much better in the office market. There, there is no scarcity, but simply structurally less demand after the Covid pandemic. Vacancy rates in major US cities are heading towards 20 per cent, and the number of stories of entrepreneurs sitting on completely empty floors who managed to negotiate a 40 per cent discount on rent is rising fast.
In an environment where payment delays on credit card, car and mortgage loans are also rising for the first time in a long time - prompted by the fact that that seemingly endless mountain of excess savings now seems to have come to an end after all - the number of potential growth engines is visibly decreasing.
So while the chances of a soft landing are certainly not zero, I think we should still not underestimate the likelihood of a (belated) US recession. At least after the last Powell rally in the stock markets, that scenario seems to be fully priced out by investors.
Jeroen Blokland is founder of True Insights, a platform that provides independent research to build diversified multi-asset portfolios. Blokland was most recently head of multi-assets at Robeco. His chart of the week appears every Monday on Investment Officer Luxembourg.