Catalyst News

Global Economist Bernard Baumohl Examines the Economic Impact of Housing

by Catalyst Corporate | Apr 30, 2019

Could millennial student loan debt and rising construction costs position the housing market for the “perfect storm”? If so, what does this mean for credit unions, the financial industry and the U.S. economy?

“There’s no doubt that if you want a robust economy, you need to have a healthy housing market. It’s that simple,” said Bernard Baumohl, Chief Global Economist with the Economic Outlook Group, LLC. Baumohl will discuss the economic impact of today’s housing market at Catalyst Corporate’s 2019 Economic & Payments Forum this fall.

The housing industry is comprised of several vital economic sectors – from commodities, manufacturing and international trade to consumer spending and banking – that encompass a good portion of the U.S. economy. “When you look at housing and all the ancillary aspects to owning a home, you’re talking about 15-18 percent GDP. You want a sector that significant to keep growing,” he said.

How does this relate to the credit union industry? It all comes down to loans, Baumohl said. Not only do they act as a source of revenue, but they help lubricate the economy. “In terms of the housing market, credit unions are playing an increasingly important role. Last year, we saw roughly $2 trillion in mortgage origination. Credit unions have contributed to lower mortgage rates and higher deposit rates. They’re helping facilitate housing purchases, as well as other kinds of spending.”

But, housing contributes to the overall success of the economy in other critical ways that sometimes go overlooked. “A healthy housing market means real estate values are also rising, and that has an important wealth effect on consumers. If they know home values are rising, they tend to spend more on their own. The same can be said about the stock market,” Baumohl said.

“It’s important to see the ‘big picture’ and understand how it all plays into the success of our global economy.” According to Baumohl, the housing market acts as a barometer of health, and credit unions have an opportunity to use this to their advantage in gauging emerging economic trends.

When the housing market does well, the economy typically reflects that, but understanding its current state is a little complex. Experts consider several main economic indicators including mortgage rates, job growth, and new and existing home sales. “Monitoring and tracking these key indicators can be beneficial to financial institutions and help them keep their finger on the pulse of the economy.”

How is the current housing market affecting the future state of the economy and why are we potentially facing the “perfect storm”?

As Baby Boomers continue to retire, sell their homes and downsize, millennials are quickly taking over the market as the primary homebuyers. But, their crippling amount of student loan debt has led to another trend. “We see a major difference between millennials and their previous generational cohorts. They don’t have the disposable income needed to make this financial commitment, so they’re not buying homes. They’re renting,” Baumohl said.

The 2017 Tax Act has also increased the after-tax cost of owning a home and left those looking to buy on shaky ground. “The remaining homebuyers currently in the market are now second-guessing whether they can afford to purchase,” he added.

Lastly, the inventory of existing homes is low, yet the cost of building new homes has increased – both further contributing to a softer housing market. Across the nation, home builders are facing what Baumohl describes as “structural,” or non-cyclical, issues that could have long-term effects on construction costs. “This too poses a significant issue for the housing market. A shortage of good labor and the recent trade tariffs have made it harder for home builders to acquire resources, which, in turn, is affecting the number of new starts.”

Baumohl believes that, together, all these factors could spell trouble for the housing market over the next year. Whether or not the “perfect storm” is on the horizon, one thing is certain: “Higher rates will come,” he said. The financial industry can expect interest and mortgage rates to rise and buyer confidence to take a hit.

How should credit unions prepare? Baumohl offers this advice:

  1. Avoid the temptation of loosening regulations; keep your eye on your due diligence
  2. Invest in technology to improve efficiencies and boost cybersecurity
  3. Keep pushing for finance reform

For more on this topic, don’t miss Baumohl’s presentation at the Economic & Payments Forum on Tuesday, Oct. 1, 2019. Registration will open soon under Learning Center/Conferences.