Housing Market Slump Impacts Consumer Spending
The dip in US home sales is rippling through consumer spending patterns, affecting the demand for furniture and appliances due to fewer Americans moving into new homes.
This shift is reflected in the economy, evidenced by a nearly 12% decline in furniture and related item purchases from the previous year. Several home goods retailers, such as Z Gallerie and Serta Simmons Bedding, have declared bankruptcy citing weakened demand. The Federal Reserve’s campaign of rate hikes aimed at curbing inflation has led to a sluggish housing market, with mortgage rates hitting their highest level since 2000, consequently making housing less affordable than in decades.
The repercussions of reduced affordability are becoming evident, as indicators like pending sales for existing homes hit their lowest level since 2001. Although home loan rates are now easing amid expectations of monetary expansion by the Fed, it might take years for the housing market to normalize. This reduced affordability has curtailed potential spending that would typically follow home purchases, impacting retailers and industries associated with home-related goods.
Studies suggest that an average household spends approximately $8,000 more on home-related items in the two years following a home purchase, but this expenditure is dwindling due to declining home sales, affecting retailers like Williams-Sonoma and Ethan Allen Interiors Inc. Struggling with reduced consumer spending, several home furnishing companies, including Z Gallerie and Tuesday Morning Corp, have sought bankruptcy protection, reflecting the broader decline in this sector.
The surge in mortgage rates has led to a stalemate in home purchase volumes, with many homeowners reluctant to sell their homes, holding on to favorable pandemic-era mortgage rates. Consequently, new home sales contribute more to transaction volumes as developers aim to offload constructed homes. The impact of high mortgage rates extends beyond reduced demand; it’s also inflating supply-side costs for homebuilders, potentially constraining housing supply for a couple of years and impacting economic growth.