Economist Says Hot Housing Market Is a Boon to Economy
Jim Cramer, an economist with CNBC, stated on Thursday, January 21, that the strength of the housing market is a great sign for the American economy and its recovery from the COVID-19 pandemic. This is in stark contrast to the effect that the hot housing market had on the economy in 2006 through early 2007, when the bubble burst, causing the Great Recession.
New Information From the Commerce Department
On Thursday morning, the United States Department of Commerce shared data that showed December's housing starts increased by 5.8%. This was the highest level for the month of December since 2006. This yields a seasonally adjusted annual rate of 1.67 million housing units. In 2006 through 2007, this number of single-family housing units led to disaster because the housing boom was the primary cause of the Great Recession. The housing bubble burst when adjustable-rate mortgages had their interest rates increase, and people couldn't afford their mortgage payments. People also borrowed more than they could afford in the first place, and quickly fell behind on their payments. Some banks issued fraudulent mortgages to people who couldn't consent or didn't know what they were signing. Banks also misinformed people about how their mortgages worked.
What Cramer Thinks About the Housing Market's Strength
Cramer, who is the host of the show "Mad Money," said that he thinks this housing market is different from the bubble that took place about 14 years ago. He believes that it's a different situation because interest rates are still low, there is still a lot of demand for housing, housing units are still falling short of the current demand and economic pressures around supply and labor costs are a few of the factors driving up the prices. High demand, bidding wars and a desire for bigger homes are also driving both the existing home market and the new construction market.
Cramer's Thoughts on the COVID-19 Pandemic's Effect on the Housing Market
The COVID-19 pandemic has touched every area of the economy. According to Cramer, the pandemic's devastation on tourism, travel and hospitality has actually been a boon for the housing market. People are staying home instead of traveling. Rather than taking weekend getaways, people want their homes to be more comfortable, bigger and fancier. Even those who aren't in the market for a new home are seeking home remodeling and upgrade services. Their demands are also pushing the construction industry to its maximum capacity.
Why a Strong Housing Market Is a Good Thing This Time
The housing market's strength now is a good thing, explains Cramer. He argues that mortgage standards are tougher now than they were in the early 2000s. Banks bear more responsibility. It's not as easy to get a loan, and there are fewer 100% financing options. The underwriting process is more in-depth now as a result of the housing crisis from 14 years ago. Cramer also added that family budgets are in a better position to be able to make a down payment and pay the monthly mortgage because a lot of people have been saving more money since the pandemic started.
Remote Work Affects the Housing Market
A big change caused by COVID-19 is that millions of Americans are working from home now instead of from an office or other workplace. This makes it easier for a person to relocate away from their office. People also need homes with more space, especially if they have video calls or online meetings that necessitate privacy and calm surroundings. Households with children who have to learn remotely or on a hybrid schedule of some in-person education and some at-home learning also need more space.
What People Are Looking for in New and Existing Homes
Most home buyers, whether they are purchasing an existing home or buying a new construction home, want more space. People are also working with contractors to add onto their homes or to finish attics or basements in their existing homes. This is pushing up the stock prices of retailers, such as Lowe's and Home Depot. It is also driving up the cost of materials. People need furnishings, paint, carpeting and decor for their new spaces, so suppliers of those materials are also seeing a boom in sales. Cramer said that the trickling down of economic activity from real estate to appliances, furniture, decor and home supplies is important and good. He predicts that the next hot segment of the economy will be the auto industry.
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