The End of the Great American Housing Boom

What It Means for You, Me, and the U.S. Economy

The sharp run-up in housing prices means more Americans are shut out of home ownership, and economic growth will likely slow as a result.

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Few recent U.S. economic trends have fueled water cooler conversations as persistently as the housing boom across most of the country over the past decade. Millions of homeowners reside in houses today that are worth far more than when they were purchased. Millions more saw a jump in their perceived net worth, enticing them to buy, sell, and then buy new homes again amid the boom. Along the way, homeowners took advantage of low interest rates to boost their access to credit, borrowing against the seemingly ever rising value of their homes for home improvements, college tuition for their kids, a new car, and other items.

This debt-driven consumption helped spur the U.S. economy out of the recession of 2000 and then underpinned the steady economic growth since March 2001. So powerful were the effects of the great American housing boom that home prices swiftly outpaced the growth of rental prices across the country—a historic first—while boosting job growth in retail, construction, and other housing-related businesses. For a time, it seemed as though this Energizer Bunny of the current economic expansion would run forever, boosting housing wealth in unprecedented ways, and making construction and other housing-related jobs the backbone of job growth.

Yet recently released economic data paints a far different picture of the benefits of the six-year housing boom. Over this period homeownership growth dropped sharply for a significant number of Americans—Whites, Hispanics, and African Americans alike—while the equity share of homeowners’ stakes in their own homes actually decreased as homeowners piled on new debt faster than their homes appreciated. What’s worse, rising home prices led families to concentrate more and more of their wealth in their homes even as they expanded their credit lines to maintain their consumption.

These new sets of data from 2000 to 2005 allow for a detailed analysis of the housing boom in comparison to the slowdown in the housing market that began in 2006. Home price gains slowed across much of the country and in some cases, reversed direction over the course of the year. At the same time interest rates began to climb. So what does the cooling off of the once red hot U.S. housing market mean for homeowners, renters, and the overall national economy?

Housing markets by their very nature are local in scope and swayed by sentiment linked to the complexities of regional economic conditions. What’s true for Boston isn’t necessarily the case for Birmingham. The market drivers behind home sale trends in the Washington metropolitan area and the New York tri-state region are as different as they are between Dallas-Fort Worth, Greater Miami, and Silicon Valley. Yet several worrying national trends can be discerned about the U.S. housing boom over the past six years and the current rolling home price downturn. Consider that between 2001 and 2005, when home values posted their sharpest gains:

  • Homeownership growth rates slowed markedly amid steady economic expansion, leaving a large percentage of families without access to one of the key components of the American Dream—their own home.
  • Homeowners’ equity stakes in their own homes slipped even as homeowners’ percent-age of wealth tied up in their homes increased, exposing homeowning families to serious financial vulnerabilities in the event of a housing price downturn.
  • Homeowners’ overall exposure to variable interest-rate loans jumped sharply right before the Federal Reserve Board embarked on its recent interest rate hike campaign.

Then consider that beginning this year, when housing prices began to flatten or reverse course:

  • Rising interest rates on adjustable rate mortgages and home equity lines of credit now leave a large share of homeowners exposed to larger debt payments just as opportunities to sell their homes become scarcer.
  • Slowing home appreciation or contracting home prices in tandem with higher debt payments means that domestic consumption growth is now slowing, primarily because homeowners can no longer tap the equity in their homes for new lines of credit.
  • Job growth in construction, housing-related industries, and the retail sector are also slowing due to homeowners’ downturn in consumption.

The upshot? The sharp run-up in home prices, especially over the past six years, and the cur-rent flattening of home prices means that many American families may never take that first step towards homeownership due to still over-inflated housing prices and rising interest rates. Yet homeowners face the prospect of severe financial strains as interest rates rise and home sales slump amid a sharp slowdown in the ability of homeowners to sell their own homes and then buy newer, bigger ones. This means less economic activity in the important housing sector, less consumption as homeowners rein in their spending, and lower employment in key industrial and service sectors of the economy that thrived during the housing boom, which in turn points to slower economic growth.

Broadly speaking, for you, me, and the economy, that spells trouble. The detailed analysis that follows offers indications of just how serious it may become.

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Christian E. Weller

Senior Fellow