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GDI is Showing a Weak Economy—Are We Measuring Things Right?

There have been a lot of interesting threads in the economic space lately. The biggest stories have surrounded attempts to predict what the Federal Reserve will do in 2024. 

From what I can tell, many economists and investors are somewhat bullish on housing going into next year, with most suggesting that if the Fed decreases interest rates, the subsequent decrease in mortgage rates will prop the housing market up and create a new flurry of activity.

I’m a little more bearish on housing next year. While I agree that lower rates will result in more sales activity in the market, I’m not sure that it will be to the extent that some suggest. For instance, Barbara Corcoran says that housing prices will “go through the roof” if mortgage rates fall by 2%, even saying that housing prices could increase by 20% and we’ll relive the pandemic market all over again. Could that happen in some markets? Maybe. But the national market will not be anywhere near that.

There are plenty of reasons for why, but it starts with what we’re using to measure the economy.

Is the Economy as Strong as We’re Told It Is?

According to the latest GDP stats, the economy is on fire. In Q3, adjusted for inflation, GDP rose at a 5.2% seasonally adjusted annualized rate. That’s well above the norm for the U.S. this year, with the prior two quarters coming in on the lower end of 2%.

At 5.2%, the economy must be doing great! But then you realize that consumer confidence has been dropping for the past two years, interest rates are up, and personal income growth has been flat since June.

How can consumers be so pessimistic while the economy seemingly grows? It turns out that GDP’s twin, gross domestic income (GDI), has actually taken a turn for the worse. GDI estimates all income in the form of wages and salaries, corporate profits, interest and dividends, and rents.

Here are the GDI numbers over the past four quarters compared to GDP:

Quarter/Year GDP GDI
Q4 2022 2.57% -3.00%
Q1 2023 2.24% 0.49%
Q2 2023 2.06% 0.45%
Q3 2023 5.15% 1.47%

Theoretically, GDI is supposed to be equivalent to GDP. If GDP is the total value of goods produced, then GDI is the total value of income received for those goods. Yet, these numbers are not even remotely close together. How can that be?

You might say that it’s a data discrepancy or measuring issue, but the numbers have been way off for a full year now. You can see that below: 

GDP vs GDI (2021-2023) - Fannie Mae
GDP vs GDI (2021-2023) – Fannie Mae

What this really means is that the fruits of productivity are not getting passed down to the worker at a high enough clip to sustain this sort of GDP growth. It means the economy maybe isn’t doing as well as we thought. It also means that the 15-year low in personal savings rate isn’t a blip on the radar—it’s a serious threat.

America’s Savings Problem—And Why I’m Bearish

The last time the American personal savings rate was below 4%, it was 2008, and we were undergoing the worst economic recession since the Great Depression. As of October 2023, the personal savings rate is 3.8%. 

By definition, the personal savings rate is a calculation of a person’s disposable income after taxes and how much of it they actually save after personal consumption. It does not include retirement or other savings accounts, nor does it have anything to do with net worth.

What it does do, however, is tell us how strapped the average American consumer is. To paint the picture, the U.S. personal savings rate was 32% in April 2020, right when the COVID-19 lockdowns began. Stimulus checks were sent out in the following months, and the savings rate continued to stay up through the rest of 2020 and sharply declined in 2021.

U.S. Personal Savings Rate (1959-2023) - St. Louis Federal Reserve
U.S. Personal Savings Rate (1959-2023) – St. Louis Federal Reserve

All of this leads me to be more bearish than others on the economy and, particularly, the housing market.

Buyers with the savings to make a downpayment and afford the monthly payments on a home would surely enjoy the benefits of lower interest rates. But I’m hesitant to believe that we’ll see a monsoon of activity just because rates fall to around 6.5% (which, at the moment, is the consensus, not 5.5% as Corcoran suggested).

Sure, the “lock-in” effect could, and likely will to a degree, break if rates fall, thus unlocking equity that’s been stored in lower-rate mortgages. But, once again, how many sellers are going to exchange their rates? How much supply will hit the market?

In fact, existing home sales, at least during this century, have shown some sort of correlation with personal savings.

Existing Home Sales (2000-2023) - Mortgage News Daily
Existing Home Sales (2000-2023) – Mortgage News Daily
U.S. Personal Savings Rate (2000-2023) - St. Louis Federal Reserve
U.S. Personal Savings Rate (2000-2023) – St. Louis Federal Reserve

We spoke for years on BiggerPockets about buyers who kept getting priced out of markets due to runaway appreciation when rates were 5%. Now, with a lower savings rate, low income growth, two years of rampant inflation, and home prices that are still near record highs, do we really expect another boom?

Closing Thoughts

There’s also the question of whether the Fed should lower interest rates at all. Many critics say that the Fed kept historically low interest rates for far too long, dating back to 2013, leading to record home prices and a five million unit housing supply gap. Is now really the time to lower rates?

Of course, the Fed doesn’t make decisions on housing alone, or even specifically for that matter. Their goal is to keep inflation and unemployment in check. The latest job market numbers are starting to show slow growth, but unemployment remains in check. The “soft landing” the Fed was looking for seems within reach, but I still have my reservations.

My final message is simply to remain cautious of the many headlines you’re going to see over the next few months. The Fed hasn’t even confirmed the end of rate hikes, let alone slashings. Besides, real estate is local, and prices differ across every market. Look for the intrinsic variables that make a destination a good investment, like population growth, a diversified job market, and education systems, rather than making decisions based on the Fed’s latest call. 

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

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