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Are New Home Sales Important to the Economy?

Real estate plays a very important role in the U.S. Economy. Even if you’re not planning to sell a home or buy a home, what happens in the housing market affects us all. are new home sales important to the economy

Housing is one of the biggest expenses of homeowners, and it’s also the biggest source of wealth for many Americans. If you own a home, rent a home, or require a home, this article will help you to understand why new home sales are important to the economy, even if you’re not the one buying the new home.

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How Real Estate Affects The Economy

In 2018, real estate contributed well over a trillion dollars to the nation’s economy. That’s over 7% of the U.S. gross domestic product (GDP). Construction, including new home construction, is the only part of real estate that’s measured by the GDP. 

This does not mean that real estate is not measured in any other part of the economy; it is, but just not measured. This is how we know real estate is detrimental to what’s going on in the economy. 

If there is a decline in real estate sales, there will eventually be a decline in real estate prices, and this lowers the value of homes. It doesn’t just affect those actively in the market (buyers and sellers), but everyone who currently owns a home. 

This reduces the number of home equity loans available to homeowners. When homeowners aren’t able to get home equity loans they have to dip into their savings or other means to tackle costly home projects. This ties up consumer funds and causes a reduction in consumer spending, which ultimately affects the economy. 

Nearly 70% of the U.S. economy is based on consumer spending. When consumers aren’t spending this sends the economy down, which leads to several things, including an increase in unemployment. This is usually where the Federal Reserve would need to come in and reduce interest rates to avoid an overall recession.

The Recession We All Remember

During a recession, household incomes fall drastically, and consumer spending takes a nosedive, meaning the likelihood of buying a home is slim to none. If the demand for housing is low, people are listing homes and that also lessens the chance of new home construction. 

We all remember the financial crisis of 2008. Some say it was years in the making, and they could see it coming. This actually evolved as a result of what was going on in the housing market. Mortgage debt rose and borrowers were easily given access to money they couldn’t pay back, which resulted in many foreclosures. 

Financial institutions were left holding trillions of dollars worth of worthless investments in subprime mortgages, and millions of American homeowners found themselves owing more on their mortgages than their homes were even worth. In the end, it was a major financial and economic collapse that cost many people their jobs, life savings and homes; some people lost all three.

While many people could see the writing on the wall that led to this crisis, no one saw the next great hit to the American economy, COVID-19.

How The Pandemic Affected The Economy

As the nation was coming into 2020, the expectation was that it would be a busy year for real estate; homebuilders were feeling confident. Then, before the nation was three months in, COVID-19 hit, and just like that, people had to rethink everything they had intended to do in 2020.

The pandemic brought about fear, confusion, and uneasiness among individuals, families and businesses. Life was no longer the same, and everything had changed. With new, never before heard of (at least not in the last 50 years), stay-at-home orders in place, people were resigned to their homes. 

Where you lived, regardless of where that was, became your solace. Most people were even afraid to leave their homes. 

During the pandemic, the demand for homes was great. People were looking for more space indoors because it was now where all the family was at all times. 

They were looking for more outdoor space as well to adjust for not being able to go out anywhere (right as the Spring weather was coming). They needed space for virtual school and their newly assigned home offices. 

Manufacturers of accessory dwellings or tiny houses also increased as people were wanting space that allowed them solitude away from the family. If you lived in one of the hot spots during the pandemic, like New York, people were on a mission to move anywhere, but there.

While the demand for housing was strong, the supply of houses available to sell was low. People didn’t want to let people in their homes or move out. The number of homes that were originally for sale decreased as sellers took their homes off the market to prevent the spread of COVID-19. 

Events like this can affect the stock market, which impacts major companies and their futures. For this reason, it’s important to keep tabs on what’s going on in the real estate market, especially when it comes to new home sales. This is a good way for the financial experts to get an idea of what’s happening in the economy or what’s to come.

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How New Home Sales Affect The Economy

There are many ways new home sales affect the economy. An increase in new home sales provide jobs and increases the housing supply, which in turn, should make renting or buying a home a more affordable experience. When people are buying homes, it gives a significant insight into the state of the economy. 

Housing Starts

If new home sales are up, that means people are buying. They’re buying homes because they can afford to buy, which indicates a state of the employment rate; they have money to spend and feel confident about their finances. 

Along with that comes the need to purchase home furnishings and supplies for their new home. This is good for businesses, as it keeps them flourishing, which also puts the need for workers in high demand, and again we see the impact this has on employment overall. 

When the economy is robust and good, consumers are more likely to purchase new homes. When the economy is weak, they’re less likely to. 

Housing starts are important indicators that let the experts know whether the economy is healthy or not. This, in turn, affects other related market segments, like mortgages, land sales, raw materials and employment.

A Mirror of the Economy

Home sales are directly tied to the economy’s health and the rise and fall of economic activity. As economies slow, money becomes more restrictive. As money becomes more restrictive it’s harder to borrow, which means there won’t be many home buyers out there. 

Restrictive lending requirements cause fewer buyers to even be available to buy, and inventories of homes go up or take a lot longer to sell. And when there’s a greater supply of a product, along with lower demand for it, it generally means prices will spiral downward. Keep tabs on new home sales; this will help give you a look into the state of the economy.

Money and The Housing Market

By now the economic cycle should be making sense for you. But here’s one more analogy that may bring it all home. 

The state of our economy all balls down to money. And money is the central focus for anything related to real estate. The supply of money in an economy is critical to the overall health of the economy. 

This is especially true when it comes to the health of the housing market. Money drives the housing market. 

How so? When money is not easily available or is too difficult for consumers to borrow (most of us will need to borrow money to buy a new home), new home sales will drop. When money is easy to acquire, too many new home buyers will enter the market, and that will cause the cost of new home sales to go up until an inevitable event like a market crash occurs. 

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Financial experts have yet to determine how the pandemic will affect new home sales over the next year or two. According to the National Association of Home Builders (NAHB), there has been a vast improvement since the pandemic started. What a difference a year makes. 

New home sales have risen, and the demand remains strong. A year ago, new home construction came to a screeching halt, but today builders are confident and are facing a strong demand from potential buyers. 

How long will this last? The jury is still out. But you don’t want to allow another recession or inevitable turn of events to drive your supply, so you’re unable to do what you need to do financially. 

While we sit and wait to see where the economy is headed, now is the perfect time to get a free financial assessment at NextGen Wealth so you can be ready to meet your financial goals for the future.  Contact us to ask us a financial planning question or call us at 816-287-4780 today.

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About the Author

Aurtho Clint Haynes, CFPThis article was written by Clint Haynes, CFP®. Clint is a Certified Financial Planner® and Founder of NextGen Wealth. You can learn more about Clint by reading his full bio here.