Alger: Cracks in the Foundation?
Housing is important to the economy, representing approximately $38 trillion or approximately a quarter of household assets. It is also a huge component of inflation and a sector of the economy that is very interest rate sensitive. These factors likely make it a key focus of the Federal Reserve’s (The Fed’s) tightening policy. Is the housing foundation stable?
- The housing market represents one-third of the Consumer Price Index and therefore is a big part of the high inflation that the Fed is trying to mitigate. Additionally, it is a large source of American wealth that is susceptible to the Fed’s tools, given that higher interest rates make buying homes less affordable, thereby slowing housing activity.
- With the one-two punch of rising home prices and interest rates over the past year, housing affordability has declined significantly. While official numbers are not yet out, we estimate April 2022 affordability plummeted to levels not seen since the housing bubble of 2007.
- Less affordable housing may portend slowing home buying, building and remodels. It may also slow consumer spending and in particular impact household durable products, including homebuilding supplies, home furnishings, and household appliances.