The State of the US Housing Market
The United States housing market is emerging as a significant source of economic weakness, with economist David Rosenberg warning that policymakers are overlooking this critical issue. According to Rosenberg, the July data on existing home sales, which was not far from the lows recorded during the 2008 financial crisis, is a major concern.
Current Trends in the Housing Market
The data shows that despite a nearly 16% increase in the number of homes for sale compared to last year, overall sales remained flat on an annual basis. This divergence between supply and demand is putting renewed pressure on prices. Rosenberg noted that this trend is worrying, especially given that the US housing market is valued at about $48 trillion, more than twice its pre-financial crisis level.
The Risks of a Housing Downturn
A downturn in the housing market poses serious risks to the economy, as falling prices can trigger a negative wealth effect that erodes consumer confidence and spending. Historically, housing downturns have weighed heavily on the economy, as falling prices shrink household wealth, curb spending, and dampen demand, a dynamic that fueled the 2008 recession. With the current housing market valuation, a downturn could have significant consequences for the economy.
The Federal Reserve’s Focus
The decline in home values comes as the Federal Reserve focuses much of its attention on tariff-related price pressures in key inflation measures such as the Consumer Price Index (CPI) and the Personal Consumption Expenditures (PCE) deflator. However, Rosenberg warns that this focus risks overlooking a more influential factor that could shape the inflation and growth outlook: deflationary forces from a weakening housing market. As Rosenberg notes, "As for the Fed, while it remains consumed with tariff-related concerns on the CPI and PCE deflator, it is missing a very important source of downward pressure on aggregate pricing that comes from a down-cycle in residential real estate valuations."
The Potential Impact on the Economy
Rosenberg cautions that stalled sales, rising inventories, and falling prices point to renewed downward pressure on growth. He argues that while tariffs may influence inflation in the short term, housing valuations will be far more decisive for the US economy in the months ahead. The potential impact on the economy is significant, and policymakers need to take heed of the warning signs in the housing market.
Conclusion
In conclusion, the US housing market is a critical source of economic weakness that policymakers cannot afford to overlook. The current trends in the housing market, including the divergence between supply and demand and the potential for a downturn, pose significant risks to the economy. The Federal Reserve’s focus on tariff-related price pressures may be misplaced, and it is essential to consider the deflationary forces from a weakening housing market. As the housing market continues to evolve, it is crucial to monitor the situation closely and take proactive steps to mitigate any potential negative consequences.