Job and Housing Stresses Are Caught in a Vicious Loop

The housing market has been in the doldrums for three years, so it’s easy to assume there’s nothing new to the weakness there. That’s a mistake. The deterioration in housing has taken a fresh turn in recent months with important implications for the economy, particularly given growing skepticism within the Federal Reserve about a interest rate cut in December.

I noted after the Fed’s September meeting that mortgage rates at 6.25% were not sufficient to fix the housing industry’s woes. Some 1.5 percentage points of easing over the past year or so hasn’t resurrected demand enough to stabilize homebuilder profit margins or reduce the incentives they need to offer buyers. The companies are responding by reducing construction, land purchases and headcount.