Housing leads every recession since Second World War
Residential real estate is an integral part of the American economy. In fact, housing activity contributes between 15% to 18% of gross domestic product (GDP) every year, according to the NAHB. A slowdown in this sector naturally pulls down the rest of the economy.
A decline in home building and buying has led to every recession since the end of the Second World War, according to Howard. The association’s latest report indicates that buyers and builders are both pulling back from the market yet again, which could be a leading indicator for another recession on the horizon in 2022.
Builders are holding off
Homebuilders face multiple demand- and supply-side pressures.
On the demand front, potential homebuyers have receded from the market. Existing home sales slid 5.4% in June. Meanwhile, borrowing capacity has been curtailed by rising interest rates. The average mortgage rate has accelerated at the fastest pace in 35 years. A 15-year fixed rate mortgage is now about 4.8%, up from 2.2% a year ago. These factors have effectively destroyed demand.
Meanwhile, the supply chain for home building material and the cost of labor continues to increase the cost of building new homes. This is why homebuilders' sentiment dropped 12 points in June, according to the NAHB survey.
A dangerous situation
The fundamental weakness in both demand and supply-side factors creates a “dangerous situation,” said Howard. Housing has not only led the country into every recession, but it has also led the nation out of every recession since the Second World War. This time the recovery could be slower.
There’s no easy solution to the lack of labor and supply chain disruptions that plague the industry. If these issues persist, the economic recovery could take longer. Howard believes regulators need to get involved to reignite growth.
Regulators need to get serious
Policy changes are essential to resolve issues in the housing market, according to Howard. He suggests that regulators try to secure a deal with Canadian authorities to improve the supply of lumber into the U.S. That would significantly reduce the cost pressures on homebuilders.
Policies to encourage labor supply would also help. Better training for skilled labor and higher immigration of tradespeople would improve homebuilder sentiment.
Some regulations, however, need to be reduced to boost the homebuilding sector. Development charges and prohibitive planning regulations on the state and local level could be a bottleneck on housing supply.
Lowering these barriers could play a part in stabilizing homebuilding and helping the national economy course-correct. However, these recommendations may not be enough to prevent the near-term pressures homebuilders face.
Some economists believe a housing-led recession may be inevitable — if it hasn’t already begun.
Fine art as an investment
Stocks can be volatile, cryptos make big swings to either side, and even gold is not immune to the market’s ups and downs.
That’s why if you are looking for the ultimate hedge, it could be worthwhile to check out a real, but overlooked asset: fine art.
Contemporary artwork has outperformed the S&P 500 by a commanding 174% over the past 25 years, according to the Citi Global Art Market chart.
And it’s becoming a popular way to diversify because it’s a real physical asset with little correlation to the stock market.
On a scale of -1 to +1, with 0 representing no link at all, Citi found the correlation between contemporary art and the S&P 500 was just 0.12 during the past 25 years.
Earlier this year, Bank of America investment chief Michael Harnett singled out artwork as a sharp way to outperform over the next decade — due largely to the asset’s track record as an inflation hedge.
Investing in art by the likes of Banksy and Andy Warhol used to be an option only for the ultrarich. But with a new investing platform, you can invest in iconic artworks just like Jeff Bezos and Bill Gates do.