Snapshot for June 18, 2003.

Trouble in the housing market

Large stock market losses across the last few years were offset to some degree by the fact that housing wealth—the difference between housing prices and outstanding mortgages—increased, at least until the end of 2001 (see figure below). Housing prices soared, keeping the total losses to total household wealth in check.

Although housing markets are regional markets, driven by regional factors, there are some general trends that may bring this housing boom to an end by either slowing growth rates for housing prices or reducing housing wealth.

First, demand for increasingly expensive homes has been debt driven, fueled by low interest rates. This is reflected by the fact that housing wealth relative to income has declined in four out of the past six quarters (see figure) because the growth of mortgages has outpaced the growth of home values. Since long-term interest rates are already at historic lows, further declines in long-term interest rates become less likely than in the past few years.

Second, there is an attractive alternative for potential homebuyers. Historically high vacancy rates for rentals indicate that the rental market is weak. In 2002, the average rental vacancy was above 9% in the United States—the highest since the Census Bureau started collecting the data in 1956. It makes increasing sense for prospective homebuyers to rent instead.

The housing market has been a significant factor in keeping the U.S. economy from re-entering the recession. A slowdown in the housing market could therefore have real implications for the economy as a whole.

This week’s snapshot was written by Christian E. Weller.

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