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Homeownership regularly nears the top of surveys about what Americans most want in life. Alas, this part of the American dream has rarely been harder to attain. Those looking to enter the property market face a triple whammy of high prices, costly mortgages and limited choice. Together these factors have conspired to make housing deeply unaffordable, with little sign of relief on the horizon.

Yet in a roundabout way, the property crunch also helps explain one of the most pressing economic conundrums of the day: why American growth has remained robust, defying predictions of a recession.

The decline in transactions, all else being equal, ought to hurt the economy, dampening housing-related activity, with less money spent on remodelling, new construction, furniture and so on. This is not how things have played out. Unable to trade up to nicer digs, locked-in homeowners have invested more fixing up their current homes. The rise of remote working has reinforced that trend, with people adding extra office space to their houses. Remodelling expenditures in 2022 reached nearly $570bn, or about 2% of gdp, up by 40% in nominal terms from 2019, according to the Joint Centre for Housing Studies at Harvard University.

Many of those braving the market in order to buy homes have opted for new-builds, not existing stock. One advantage of newly built homes is that they are actually available. Thus they account for about one-third of active listings this year, up from an average of 13% over the two decades before the covid-19 pandemic, according to the National Association of Home Builders. As Daryl Fairweather of Redfin puts it: “Builders are benefiting because they don’t have competition from existing homeowners.”

Homebuilders have also been bold in offering incentives to buyers. Most strikingly, they have been “buying down” as much as 1.5 percentage points on mortgage rates, by paying a one-time fee upfront that reduces future interest payments. That has allowed their in-house mortgage companies to offer rates of roughly 5%. For homebuilders, these buy-downs are equivalent to knocking off about 6% from their selling price, which they can easily afford given the strength of their balance-sheets. For buyers, the lower mortgage rates are welcome relief in the current environment, which has translated into a pick-up in both purchases and construction. New starts on single-family homes bottomed out late last year. In July starts were up by nearly 10% compared with a year earlier.

Property types now wonder whether the price resilience will continue. The market faces a test as mortgage rates climb even higher. For much of the past year rates had seemed to stabilise at around 6.5%, but since the start of August investors have concluded that the Fed will keep policy tight for longer, which has pushed up mortgages towards 7.5%. “The higher rates go, the more demand falls. This is going to catch up with the homebuilders pretty quickly,” reckons John Burns, a property consultant. To counteract a slowdown, some lenders may offer riskier deals. Zillow, a property platform, is now promoting downpayments of just 1% on homes in Arizona, a once-hot market. If prices fall, owners with little equity in their homes may be among the first to default.

If, though, the property market does remain resilient, it is the Fed’s policymakers who will face a test. Strong housing-market activity contributes to an overheating economy. A sustained rebound in prices would also complicate the inflation outlook. The relationship is not entirely straightforward. since property shows up in inflation indices in terms of rental prices, rather than purchase ones. Moreover, the main inflation gauges tend to lag high-frequency measures of rents by at least six months. These high-frequency measures have fallen for much of the past year, and that decline is just now filtering into official inflation indices—a process that will probably continue into early 2024.

What happens after that is much less certain. On the one hand, a record number of apartment units are under construction, and this supply ought to keep a lid on rents. On the other hand, the unaffordability of housing is forcing more would-be buyers into the rental market, which could push up rents and add to inflation. One big thing is clear: until interest rates come back down, millions of Americans will have little choice but to defer their dream of homeownership. ■