There are three negative developments in the U.S. housing market, the U.S. economic ramifications of which we should be worried about. These developments are the collapsing homeownership rate, falling household incomes, and declining housing starts. They all suggest the housing market is headed for trouble.
Homeownership in the U.S. Economy at Multi-Decade Low
The chart below is of homeownership in the U.S. economy.
The homeownership rate in the U.S. economy has collapsed to the lowest level since the late 1980s. At the very core, it says Americans are exiting the housing market. This is the last thing you want if you’re hoping for home prices to go higher in the U.S. economy.
Will the U.S. Housing Market Recover with Falling Incomes?
Another problem for the U.S. housing market is declining household incomes. In 2014, the median household income in the U.S. economy was $53,657; in 2007, this figure was $57,357. (Source: U.S. Census Bureau, last accessed October 19, 2015.) During the so-called economic “recovery,” household incomes declined 6.5%. This is dangerous for the housing market; as incomes fall, homes become less affordable for Americans.
Housing Starts Trail 50% Below Previous Highs
Last but not least, demand in the housing market is still very weak.
We examine demand in the housing market by looking at the actual number of homes being built. The chart below shows the annual rate of housing starts in the U.S. economy.
It’s been nine years since the housing bust and the number of new homes being built is still 50% below where it was in 2006! We are nowhere close to witnessing the demand as we saw prior to the housing market crash. Housing starts came in at an annual rate of 1.12 million units in August of 2015; back in 2006, it was around 2.2 million.
Why Should U.S. Housing Matter to You?
Yes, certain pockets in the New York and San Francisco luxury real estate markets are still strong. But this is a very, very small part of the U.S. housing market and it is not representative of what’s really happening across the country.
The housing market has a huge impact on the U.S. economy. When it improves, consumption increases. In turn, this boosts U.S. gross domestic product (GDP). Right now, the housing market is a drag on U.S. GDP. And I don’t see that changing any time soon, given that the homeownership rate is collapsing and incomes are not rising. Add in still tough mortgage qualification practices and the housing market has one big noose around its neck.
Stay in the loop. Follow Michael on Facebook and Twitter.