America’s Struggling Housing Market Won’t Sink Stocks

Amid all this autumn’s rate cut chatter, one rate isn’t exactly playing ball: Despite ticking down over the last year, 30-year fixed mortgage rates haven’t reversed 2022 and 2023’s fast rise, contributing to weak US housing market activity. Pundits are watching this closely and, given the sector’s presumed economic importance, suggest it could hamper growth ahead. Now, the US housing market isn’t in great shape—that is true. But residential real estate is a tiny slice of US GDP, so we wouldn’t overrate its broader economic or market influence.

Housing has struggled since early 2022, when the Fed’s hikes began pushing mortgage rates up. 30-year fixed mortgage rates rose for months before peaking around 7.8% in October 2023, well above levels seen throughout much of the 2010s.^[i] As widely expected, this took a toll on the credit-sensitive sector. For one, sellers became hesitant to abandon their existing 3 – 5% mortgage for a higher rate. This bottlenecked supply and zapped sales for existing homes (the majority of America’s housing market), sending prices skyward.^[ii]

Existing-home sales usually get lots of media attention, but new home sales are more important from a pure economic standpoint. High prices should be a positive on this front, encouraging investment in construction. But it hasn’t exactly worked out like this. New housing starts tumbled when rates rose, dropping -26.7% from April 2022 through that yearend.^[iii] Despite some false starts since, they have trended sideways and down, hitting a fresh low in July this year.^[iv] Turns out that while higher prices can encourage supply, when you combine them with high mortgage rates, the elevated payments deter new homebuyers.

Accordingly, residential real estate investment—the housing market’s GDP component—tanked, falling -8.6% in 2022 and -8.3% in 2023.^[v] This is objectively bad. And yet, it wasn’t enough to tank growth overall. GDP grew fine in both years, up 2.5% and 2.9%, respectively, as other factors like business investment and consumer spending drove growth.^[vi] US stocks fell alongside housing activity in 2022, as a multitude of non-housing factors (i.e. Russia’s war in Ukraine, hot inflation, etc.) weighed on sentiment and returns.^[vii] But they recovered swiftly, rising 26.3% in 2023 despite housing’s continued weakness.^[viii] Weak real estate investment couldn’t hold stocks down, either.

So we have already seen that whatever happens with housing, stocks and GDP can do fine. Maybe mortgage rates’ recent rise continues, but stocks rose for a whole year between their October 2022 low and mortgage rates’ October 2023 high. Real estate investment’s renewed decline the past two quarters, which truncated an attempted recovery, didn’t prevent GDP from continuing to grow … or stocks from continuing to rise.

Housing looms large in everyday life. We all need a place to live, and as an asset base, housing is huge. But GDP is a flow of all economic activity, and real estate is a tiny part of that flow—only around 3 – 5% of GDP, depending on the year—giving it very little influence on overall growth. Its troubles, however huge to the industry itself, are at worst a modest headwind. And its successes, however big, are at most modest tailwinds. Consider Q4 2022, when residential real estate fell -22.8% annualized.^[ix] This detracted just 1.1 percentage point from headline GDP growth. Similarly, when residential real estate grew 13.7% annualized in Q1 2024, it added just half a point to headline growth.^[x] A big movement in a small industry tends to have a minimal impact in the grand scheme of things.

Experience tells us that much of the perception about housing’s importance is related to 2008. Many (wrongly, in our view), presume the bursting housing bubble drove 2008’s global financial crisis. But the housing bubble burst in late 2005—see residential real estate’s detracting from GDP throughout 2006 and 2007.^[xi] Rather, 2008’s collapse was much more about November 2007’s misapplication of FAS 157 (the mark-to-market accounting rule) to all banks’ assets, including illiquid ones they never intended to sell, to the going market price. Once in effect, it forced banks to value illiquid assets they intended to hold to maturity to fire-sale prices as hedge funds liquidated similar securities, creating a destructive feedback loop. Said differently, it was the accounting rule that transmitted housing’s problems to banks and multiplied about $200 billion worth of actual loan losses into nearly $2 trillion of exaggerated and unnecessary writedowns that wreaked market havoc, not the decline in property investment.^[xii] Then the government’s haphazard efforts to “help” fomented a financial panic.

This disconnect between housing markets and the broader economy is probably why stocks have shrugged off the sector’s latest struggles. As residential real estate contracted over the last two quarters, US stocks grew 10.4%, slightly outpacing global stocks over the same stretch.^[xiii] If housing’s weakness were portending wider pain ahead, we doubt stocks would be floating near all-time highs.

Again, the US housing market is still struggling as higher mortgage rates continue to clamp supply and demand. Yet, for all the pixels it receives, we wouldn’t base portfolio decisions on housing alone. It simply lacks the power.