September 19, 2023

The Current Housing Market and Its Impact on Economic Growth

If you are shopping for a new home, you understand how difficult and competitive the housing market has become. In this episode of Buckingham Weekly Perspectives, Chief Investment Officer Kevin Grogan shares how the lack of inventory combined with high interest rates is impacting home sales and overall economic growth.


Kevin Grogan: In today's video, I'm going to talk about the current housing market and how it might affect economic growth here in 2023 and also how it may affect 2024. And also just kind of things you should be thinking about if you are considering a move with respect to your home.

Historical Context That Impacts Today’s Home Sales

Kevin Grogan: I think as we talk about the housing market, we can't talk about what's happening today without kind of zooming out and providing some historical context, which really starts back in the early 2010s. If you go back to that decade, what you would see in terms of new home construction is very, very little new home construction, very, very little new supply for the housing market. And if you think about the decade that immediately preceded the 2010s that really kind of makes sense, we had the financial crisis in ‘07 and ’08 and homebuilders really pulled back coming out of that financial crisis. So we actually had an underbuilding and undersupply of new homes in the 2010s, which we're still feeling today because, of course, that affects prices going forward. Now, I'd say the bit of good news that we have seen some pickup in new home construction here in 2023. And if you look at surveys of builders, that is likely to continue into 2024. So we are starting to catch up at least a little bit. But again, we had more than 10 years of underbuilding and undersupply, which affects prices that we see today.

Record-High Mortgage Rates

Kevin Grogan: The other big story that you see in housing markets are, of course, mortgage rates, which are the highest that they've been since May 2021, which has a huge effect on first-time homebuyers, as well as an effect on existing homeowners who might be inclined to upgrade their home either to a newer home or larger home. So currently, the 30-year fixed-rate mortgage is at 7.5%. And again, this is the highest it's been in more than 20 years, which has a real effect on how much home people can purchase, how much they can spend on a new home. And so Redfin actually came out with a report that said that a homebuyer with a budget of $3,000 for their monthly payment has lost about $71,000 in purchasing power. And that's due to a combination of higher mortgage rates and just higher prices overall that we've seen over the past few years. And so kind of the bottom line here is if you are an existing homeowner who has a mortgage rate at, say, 3% or so and now mortgage rates are at 7.5%, you're not inclined to sell your home. You may not be able to afford a meaningful upgrade that would be worth giving up that 3% mortgage that you have today. And so this has been pervasive across the housing market, which has led to relatively low resale inventories. And that, of course, influences the price, which is now higher than it has been, say, four or five years ago. And so this level of interest rates is a pain point specifically in the housing market, but of course, it's across the economy as well. And so that's kind of what the Fed is looking to engineer, is higher interest rates to help kind of slow down the economy and help reduce inflation. But specific to the housing market, we've seen both high interest rates slowing things down and higher inflation, which has caused an increase in home prices, which makes housing less affordable for, again, both first-time homebuyers and existing homeowners who are looking to upgrade their home.

How Can We Thaw the Housing Market?

Kevin Grogan: In terms of what might improve this going forward. If we do see a decline in mortgage rates, that could cause kind of a thawing in the housing market, you could see an increase in supply of existing home sales, which could cause more transactions and cause housing to be a bit more affordable than what it is today. If you do have any questions on anything I've covered in today's video, please don't hesitate to reach out to your advisor.

If you have any questions please feel free to drop us a note.

Source: Redfin

For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is based on third party data and may become outdated or otherwise superseded without notice. Third party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. The time frame chosen because of the dates of available data. The inception of the AIEQ ETF was 2017. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio nor do indices represent results of actual trading. Information from sources deemed reliable, but its accuracy cannot be guaranteed. Performance is historical and does not guarantee future results. All investments involve risk, including loss of principal. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed the adequacy of this information.

About the Author

Kevin Grogan

Chief Investment Officer

As Chief Investment Officer for Buckingham Wealth Partners, Kevin conducts investment research and writes articles on a wide range of topics, including retirement planning and investment policy. Kevin co-authored "The Only Guide You’ll Ever Need for the Right Financial Plan" with Larry Swedroe and Tiya Lim. This step-by-step handbook focuses on the art of investing by providing investors with information they can use to build a tailor-made investment strategy. Kevin holds an MBA from Saint Louis University and a bachelor’s of science in finance from Missouri State University in Springfield.

Stay Connected With Buckingham

Want more resources like this? Click here to receive financial insights, articles, videos and webinar invitations.

Sign Up For Email