MainStreet Macro: Add this must-have summer data to your economic toolbox

Summer is here, and with it, the return of peak homebuying season, a time when families rush to find their dream house before school starts in the fall.

Even if you’re not a homeowner and have no interest in buying, this pickup in activity can have consequences for you. Homebuying season comes with an abundance of important data on the housing market, which in turn can tell us a lot about consumers and the economy.

That’s especially important this year, as the Federal Reserve attempts to bring down inflation without triggering a recession.

Here are four reasons why housing data is your must-have economic tool for summer.

Interest rates

Fed policymakers didn’t raise interest rates this month, but they also indicated that the pause would be short-lived. Rates are likely to rise for the rest of the year. 

Housing is one of the most interest-rate sensitive sectors of the entire economy. How home prices and sales respond to higher-for-longer rates will determine whether or not the Fed can bring the economy in for a soft landing while it battles inflation.

Inventory

The supply of houses and condominiums for sale has been chronically low for a very long time. That shortage has made the pain of rate increases worse, because home prices haven’t fallen in proportion to higher borrowing costs.

Lately, we’ve seen some good news on this front. Homebuilders finally are feeling more optimistic after years of being weighed down by high construction costs and labor shortages, and they’re breaking more ground for new construction.

Housing starts reached a 1.63 million annualized pace in May, an increase of nearly 22 percent from April and up nearly 6 percent from 12 months earlier. Building permits were up, too.

Even the inventory of coveted single-family homes is starting to increase, though single-family starts remain 7 percent lower than they were a year ago.

More inventory is like an escape valve – it helps release the pressure of high borrowing costs.

Equity

Rising borrowing costs have slowed housing price gains and have taken a toll on home equity. Overall, however, the total value of home equity held by U.S. households remains near its 2022 record high, coming in at $28.6 trillion in the first quarter of the year.

This massive store of wealth has been supporting consumer spending, which is the primary driver of economic growth. If home equity shrinks dramatically, people could pull back on spending and inflict pain on the overall economy.

Student debt

In addition to these significant market challenges, many homeowners and house-hunters will face new financial obligations this fall.

Student loan deferments, in place for three years, are about to end. Those loans, which totaled $1.6 trillion in the first quarter of 2023, will start accruing interest again in September. Payments will resume again in October.

It remains to be seen whether the resumption of student loan payments will make it difficult for homeowners to make timely payments on their mortgages.

As we monitor the health of the housing market and the overall economy, we’ll be watching to see if mortgages or student loans are hit by delayed payments or outright delinquencies. If they are, we can expect the consequences to ripple to other parts of the economy.

My Take

Even if you’re not a homeowner or in the market to buy, there are a number of reasons to care about the housing market right now.

In addition to the four I’ve named above, here’s one more. Housing is a big-ticket item in the basket of things economists use to measure inflation. In fact, it accounts for 40 percent of the basket used to measure core inflation, which excludes food and energy.

With housing supply and demand out of whack for more than a decade, prices remain elevated and growing even as mortgage rates are at the highest level in two decades. That insidious combination of high prices and higher borrowing costs is making housing one of the most important barometers of the overall health of the economy.