(Bloomberg Opinion) -- The U.S. Commerce Department's report on third-quarter gross domestic product was almost perfect in every single way. Almost. The data showed an economy that expanded above trend without any real inflationary pressures. That's the very definition of a "Goldilocks" economy — not too hot and not too cold. Just right.
But there's one part of the report that should raise some red flags. Residential investment fell 4 percent, marking the third straight quarterly decline. That hasn't happened since late 2008 and early 2009. On top of that, the government said earlier this week that purchases of new U.S. homes fell in September by more than estimated to the weakest pace since December 2016. Also, existing home sales are running at the lowest rate since 2015.
Now, no one is calling for a real estate crash, but it's clear that 30-year fixed mortgage rates hovering around 5 percent — the highest since 2011 and up from less than 3.50 percent in late 2016 — are starting to bite. The National Association of Realtors says housing affordability is the lowest since 2008. And with the Federal Reserve still leaning hawkish, with more interest-rate hikes coming, housing will probably become even more unaffordable.
There's an old saying among realtors that prospective homebuyers aren't buying home prices, they’re buying a monthly mortgage payment — and those monthly payments are getting very expensive. According to Black Knight’s August Mortgage Monitor, the monthly payment on the average home has jumped by 16 percent since the start of the year. That's up from a 3 percent increase in 2017, illustrating the effect of rising rates on affordability.
No wonder that home prices are under pressure. The Federal Housing Finance Agency said on Wednesday that its House Price Index rose 0.3 percent in August, below this year's average of 0.5 percent and 2017's 0.6 percent increase.
The one positive is that the housing market has become a smaller part of the overall economy in recent years. Deutsche Bank (DE:DBKGn) AG’s chief international economist Torsten Slok wrote in a report this week that the slowdown is happening from a level that is very low, with housing accounting for only about 4 percent of GDP today, down from about 6.75 percent before the financial crisis. "Put differently, the potential for a big correction in housing — and hence in GDP — is limited given that we are already at a low level of housing starts and permits, in particular when taking demographics and household formation into account," Slok wrote in the report.
That may be true, but housing still accounts for the bulk of the net worth among many consumers, and if those consumers feel that that can no longer rely on their homes as a wealth-building product, they may restrain their overall spending, which still accounts for about two-thirds of the economy.