After a winter slump, early data—from new construction starts to the volume of existing home sales—suggests residential real estate has lagged significantly behind this spring’s broader economic growth.
This slowdown in housing momentum is likely the result of a combination of factors, some of which are actually positive signs of economic stability. Progress was made in clearing foreclosed homes, as demonstrated by the market’s share of foreclosures tapering sharply over the past year. Foreclosed properties accounted for only 14 percent of all home sales in March—less than half their 2012 share.
Other indicators prove to be more ominous. Home prices and mortgage rates have risen simultaneously, depressing the volume of home sales. Despite an 8 percent annual rise in the average home price, the total value of newly-issued mortgages fell from $585 billion in the second quarter of 2013 to a mere $300 billion for the first quarter of 2014, reversing two years of steady growth. Thirty-year mortgage rates have risen from 3.7 to 4.3 percent over the same timeframe, placing home ownership out of reach for many new buyers.
Ultimately, housing’s recovery probably will be slow going, and unemployed construction workers will have a harder time finding work. But a new normal is emerging in the nation’s economic life, and housing will play a smaller role than it has in the past. Investment previously funneled into real estate speculation will find more productive use in equities markets, and the rebalancing may ultimately strengthen the economy by spreading consumption more evenly across sectors.
Homeowners who have lost faith in the stability of real estate will adopt new investment strategies, placing their retirement savings in mutual funds instead of mortgages. When a greater share of the nation’s income goes towards consumer spending and productive investments—instead of monthly mortgage payments—the rebalanced economy will emerge with greater resilience and flexibility.