Did you know that 70% of the U.S. economy is driven by consumer spending? This is why it is crucial that the consumer has money to spend. Lower interest rates tend to help consumers borrow and spend more money. If you have lower interest rates on mortgages, you have a lower mortgage payment so you can spend more money on other things. But with recent market volatility, and rumors of the “R” word lingering (recession), the housing market slowdown may be a signal that consumers aren’t responding to low interest rates as expected.
As you can see from the chart below, new and existing home sales in New York City, Jersey City, and White Plains had both dropped like a rock over the spring and summer selling season of 2018. Historically, home buying and selling activities swell during the spring and summer months of the year, and trail off during the fall and winter. Although we’ve had very low interest rates, even now the houses don’t seem to be selling. What gives?
It appears consumers aren’t buying and selling in real estate as they once were. Could this be the aftermath of the state and local taxes (SALT) deduction cap? I believe real estate is a victim of bad tax policy, which was originally associated as part of the Trump tax cuts that went into effect in 2018. Lawmakers aimed to cut high business tax rates, but also had to limit the deductions for state and local property taxes and mortgage interest rates. This has an outsized impact on high property value areas such as the Northeast. From a real estate standpoint, New York, New Jersey, and Connecticut are some of the hardest-hit states.
What does a lack of new and existing home sales mean for the markets? Typically, investors watch the housing market as a leading indicator of what is going on in the economy. If housing is growing and doing well, the general stigma is that the economy should follow suit. The real estate market will tell us if people are actually buying and spending money on homes or if they’re holding their money. Although interest rates have decreased to 3.6% for a 30-year fixed rate, housing across the board is slow. Builders and other folks on the housing side of the business seem to be struggling as well. If there is no demand, there is nothing to build, and no money to be made.
With recent market volatility, investors need to know when to hold ‘em and know when to fold ‘em, as the popular song goes. I’m watching the housing market closely because I believe it could be an indicator of that dreaded “R” word.
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