Economists' Outlook

Housing stats and analysis from NAR's research experts.

Instant Reaction: GDP

The economy contracted 1.4% in the first quarter of 2022 as consumers cut back on essential spending

The economy, measured by gross domestic product, contracted at an annual rate of 1.4% in the first quarter of 2022. What is more alarming is that even as personal consumption spending rose at a faster pace of 2.7%, the increase was due to one-off purchases like recreational vehicles (13.4% quarter over quarter or q/q) and motor vehicles and parts (14.3% q/q). However, consumers cut back on essential basic items like gasoline (-18% q/q), clothing (-8% q/q), food /beverage (-4% q/q), and furnishings/household equipment (-6% q/q). This is a clear indication that consumers are tightening their belts with inflation eroding purchasing power. My projection is that with consumer spending taking a hit from inflation, the Fed will stick to its plan to raise interest rates to control inflation.

Consumers are already pressed to dip into their savings as well. The personal savings rate further decreased to 6.6%, which is already below the pre-pandemic rate of 9.7% in 2020 Q1.

However, spending on services like housing and utilities increased from the prior quarter (+15% q/q) and transportation (5% q/q), recreational services (5% q/q), and food services and accommodations (10% q/q). Some of this increase in spending for recreational services and for accommodations may have been planned before inflation hit, but it is not likely that these will be sustained if consumers are cutting back on essential items.

On the positive side, investment in residential structures bucked the decline and is up 2.1% on an annualized rate. March housing permits and starts figures indicate that housing construction is ramping up for multi-family housing (which is good news for renters) but declining for single-family housing (not good news for potential homeowners). Investment in non-residential structures (commercial buildings) was down 0.9%, with the decline likely coming from office construction which is still suffering from an elevated vacancy rate. On the whole, housing and utilities and investment spending on residential and non-residential structures accounted for a higher share of GDP at 19.3%, up from 19% in the prior quarter.

What does this mean for the housing market?

The decline in consumer spending and overall economic growth portends a decline in housing demand in the coming months, as households are hit with the triple whammy of rising mortgage rates that are expected to keep rising as the Fed clamps down on inflation, sustained house price increases amid tight supply, and higher inflation. Households need about $1,000 more just to be able to maintain the same level of consumer spending as one year ago and to be able to afford a higher mortgage. NAR expects existing-home sales to contract by 9% in 2022.