What is the impact of real estate on the economy?

Ben Bernanke stated at a lunch in Arlington, Virginia that the real estate market is one of the two main factors hindering economic recovery. High housing prices, limited inventory, and high mortgage interest rates. These are all characteristics of the current real estate market. Potential buyers are starting to feel frustrated. Some people even completely give up the idea of buying a house.

Firstly, most renters believe that the American dream of owning a house has been shattered. According to a recent Guardian Harris poll, 57% of renters believe that the American dream of owning a house has been shattered. The current real estate market situation will not last forever. Therefore, over time, buying a house may become easier. But even if this situation does not occur, long-term renting is not a problem. In some cases, becoming a lifelong tenant may actually be economically advantageous.

Secondly, an important reason for the current rise in housing prices is the limited inventory available for selection. The reason for the low inventory is that many homeowners refinanced in 2020 and 2021, when mortgage lending institutions significantly reduced interest rates. So now, people with a 3% mortgage don't want to exchange it for a loan of around 7%, which is exactly what buyers value today. Buyers who purchased houses before 2020 or early 2022 may be enjoying very favorable mortgage interest rates. Therefore, they may also be less willing to sell their homes. But once mortgage interest rates start to decline, homeowners may not be locked in their property like they are now. Therefore, it is possible to see a significant increase in the number of unsold properties, which may lead to a decrease in housing prices.

Specifically, the Federal Reserve has stated that it will begin lowering interest rates this year. The Federal Reserve does not set mortgage rates, but when it raises the federal funds rate, the borrowing rates of major banks often increase accordingly. Once the Federal Reserve starts lowering interest rates, mortgage loans may become more affordable. This may lead to more people moving and a general increase in real estate listings. There is a great demand for housing in many aspects. Americans who have owned houses during the COVID-19 epidemic believe that they need more space, especially with the rise of home office. A large number of millennials are likely buyers for the coming years, along with a group of young Hispanic immigrants who are passionate about owning homes.

In addition, owning a property is often associated with wealth growth and financial stability. But even without owning a property, it is entirely possible to achieve good financial development. In fact, if all the money saved each month due to not having to pay for property maintenance and repairs is invested and accumulated for oneself, there is no need to deal with the trouble of owning a house.

Furthermore, real estate market experts and economists point out that low levels of housing inventory are another major factor hindering homebuyers from purchasing affordable housing. The US real estate market is experiencing its worst housing sales slump since 2010. In fact, according to data from the National Association of Real Estate Agents, the seasonally adjusted annual sales of completed homes in September this year were 3.96 million units, a decrease of 15% year-on-year.

Overall, although the real estate market has cooled down, the current slowdown does not appear to be as sluggish as most real estate markets. House sales have declined, and inventory of unsold units has also significantly decreased. In recent months, many economic commentators have expressed pessimism due to high mortgage interest rates, inability to pay off mortgage loans, and potential economic recession. This is consistent with the record growth in rental value in various states in the United States.