Existing home sales don’t have the same direct impact on the economy overall that the sales of newly constructed houses do. But because a sale results in a flurry of consumer spending on everything from couches to contractors, the current slow pace of sales is eventually going to be a drag on the economy.
That’s the view of Odeta Kushi, deputy chief economist at First American Financial Corporation, who says “history suggests” that fewer sales will impact the economy indirectly because there will be less spending on furniture, appliances, electronics, and other durable goods.
Save for last year’s fourth quarter, the year-over-year growth of existing home sales has remained negative for 15 consecutive quarters. Sales in June were just slightly above an annual rate of 4 million but still down 0.7% year-over-year, the National Association of Realtors reported.
But the slowdown has yet to be reflected in the overall economy, Kushi says, largely because consumers continue to spend on durable goods after moving. But sooner or later, consumer consumption will slow, she says. And that will be reflected in the country’s gross domestic product.
“Fewer home sales may not necessarily cause an economic downturn on their own, but they can contribute to softer household consumption and services output, particularly when the slowdown is prolonged.” —Odeta Kushi, Deputy Chief Economist, First American Financial Corporation
Sales of existing houses are “a window into the health of the economy,” not just the housing market, according to the First American economist.
“Existing-home sales might not directly show up as new output, they act as a key conduit through which consumer spending flows,” she explains. “Monitoring housing turnover gives us an important read on the housing market, but also a glimpse of the potential demand for everything from couches to contractors and, ultimately, on the health of the broader economy.”
The slow pace of sales — the annual rate in June is well below the pre-pandemic pace of 5 to 5.5 million, and far below the peak of just over 6 million at the height of the pandemic boom — isn’t just a housing story, but one that ripples through the economy as a whole.
Housing accounted for just over 16% of GDP last quarter, which is in line with pre-pandemic averages, though notably below the nearly 19% share seen before the global financial crisis. But again, existing-home sales don’t directly contribute to GDP the way new-home construction does, Kushi explains.
“Since the home itself already exists, it’s not measured as a newly produced output. However, existing-home sales do have important indirect economic effects,” she notes. “Home purchases typically unlock a burst of consumer spending on durable goods and trigger demand for such services as remodeling, moving, inspections, and mortgage origination.”
“A sustained downturn in sales can soften this extra consumption, which shows up in the GDP data,” the economist warns. “Fewer home sales may not necessarily cause an economic downturn on their own — but they can contribute to softer household consumption and services output, particularly when the slowdown is prolonged.”
