Property Boom and Economic Bust
There is nothing more American than apple pie, baseball, and the dream of buying a new home. For many years, however, this dream of becoming a homeowner has been just out of reach for many citizens. Recently, the dream has become more attainable, and both buying and selling homes has increased. Despite the pandemic raging around the nation, and an uncertain economy, there is one thing the virus cannot slow down: the housing market. With an entire country full of people stuck at home, many Americans are using this time to buy the home of their dreams, downsize, or move.
How Buying Your Dream Home Hurts the Economy
Reaching levels not seen since 2006, the US housing market is at an unprecedented juncture, with houses selling like wildfire. Considering the high unemployment rate, job losses, and a shaky economy in the country right now due to the pandemic, this is even more astounding. Interestingly, housing levels are also up in China, a full 14 percent higher than compared to last year at the same time.
This all sounds like splendid news, right? More people in the country have the down payment available to put down on a new house, and the stability to finance a mortgage. Mortgage rates are at an all-time low, around 2.5 percent in most places across the United States. The price of houses is rising, and this buoys the country’s economic activity. Recently the housing market “recorded the highest two-month appreciation between May and July — at 2% — in 30 years of record-keeping. New home sales were up a remarkable 41% year-over-year for the month of October.”
This seems like a positive for the overall economy, and it is in the short term. But experts warn that a housing boom is not really a positive for long-term economic stability. In a recent Wall Street Journal article, The Bank of International Settlements says those companies with more real estate assets are actually less productive. But because these companies own a lot of collateral, they can borrow more, leading to a lopsided economy, especially if housing prices continue to rise over several years.
This process continues to affect the economics of the country, especially when the housing market continues to escalate. Skewed capital means that for every “10% increase in real-estate prices, an industry would record a .6% relative decline in total factor productivity.” The positive trajectory of the housing market does not last, when overall productivity is factored in.
Although this topic is not a mainstream worry, considering the election turmoil, the health of the nation, and the high unemployment rate, it is something to monitor. The same problem is happening in China. The housing market is flourishing, and people see that as a positive sign. However, in China, borrowing costs for manufacturing companies rise where housing booms are extreme.
This cause and effect seem difficult for the average citizen to worry about, but economists understand how high housing costs lower productivity down the line. Policy makers need to monitor this for the future, and perhaps will need to step in to stabilize the market.
Entrepreneurs Need Your Savings
The interconnectedness of all facets of the economy makes it an interesting topic to study. One reason that a higher housing market hurts the overall economy is that entrepreneurs need your money to turn their ideas into reality. At first glance this seems like a strange juxtaposition, but if you sink all your money into a house, it is therefore not free to be spent in other ways. In order to innovate and grow, the country needs to experiment and create, and they need your money to do it.
Forbes magazine explains it this way: “Consumption doesn’t power economic growth: rather, it’s a consequence of it.” Economic growth is born from new products, and new technologies that consumers are eager to get their hands on. And in order for new products to be developed, more capital is needed.
Although owning a home seems like a great way to move the country forward, it is savings and investments that boost productivity. When people buy houses, they spend money, but it is not exactly an investment. If so, much money is tied up with banks and mortgage payments, there is not as much to use for innovations.
Paraphrasing John Stuart Mill, a 19th century philosopher and economic thinker, “Progress is the remuneration of abstinence. Entrepreneurs power progress, but they’re not entrepreneurs without access to savings.” The country will move forward, but someone needs to abstain in order to do it. If everyone is buying a house, entrepreneurs will not have access to the cash supply they need.
Entrepreneurs are the idea people, and they need someone else to front the cash to turn their ideas into reality. If they have money, entrepreneurs can turn ideas into reality, and bring the future into the present.
Additional Fallout of Housing Boom
Time will tell how the current housing boom will affect the future economy. With much life at a standstill in the pandemic, people will continue to buy and sell their houses and find new places to call home.
One problem is that there are not enough new houses to go around. The demand for new houses is so high, and builders can only build so fast, especially since some supply chains have been compromised with the pandemic. The total inventory of new houses available on the market “hit a record low of just 2.7 months' supply in September. It sank even lower — down to 2.5 months' supply in October.” This is bad news for people trying to buy a new house, and a puzzle for home builders who are trying to increase inventory before the winter roars in.
As has been the case since early in the year, 2020 has brought unprecedented experiences to the table. With a COVID-19 vaccine on the horizon and houses selling like hotcakes, even during November when house sales normally drop, this is far from a normal year. But economists warn that the positives of lucrative house sales may not translate into future economic growth and productivity. Entrepreneurs are churning out new ideas and looking for some capital to back them up. As a weary nation wraps up 2020, one could say that anything is possible.