Home affairs: America’s revealing property market

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Hello and welcome to the Intelligence from the Economist. Today from London, I'm your host, Jason Palmer.

And in New York, I'm John Fassman. Every weekday we provide a fresh perspective on the events shaping your world.

For all of China's successes at sport, there's one repeated crushing failure. The country just can't put together a good national football team. We ask why not?

And in America, rap songs are increasingly being used against defendants in court. The song's lyrics can often sound like an admission of guilt by the singer. Fair warning, dear listener, the songs you'll hear today contain some pretty sweary language. But first, As the cold weather relents and green shoots emerge across America, the house buying season is getting underway. Spring is the property market's most active period, and the way it goes can tell us a lot about the American economy. Economists will be watching to see whether the activity presages a soft landing or a recession. And with so much riding on it, the Federal Reserve has been monitoring closely. And yesterday, citing worries about inflation in the broader economy, Chairman Jerome Powell came out with A warning.

The latest economic data have come in stronger than expected, which suggests that the.

Ultimate level of interest rates is likely.

To be higher than previously anticipated. If the totality of the data were.

To indicate that faster tightening is warranted.

We'D be prepared to increase the pace of rate hikes.

His announcement has already prompted a stock market sell off. And while Chairman Powell says he expects housing inflation to decline, if it doesn't, the Fed may take action, raising interest rates higher and more often. That could pinch home buyers and much of America's economy beyond. In the coming months, most listeners will.

Remember that two decades ago the US Housing market is to what a large extent precipitated the global phenomenon financial crisis. This time it's important again, but for a very different reason. The fundamentals are much healthier than, say, in 2005, but instead it's become a crucial bellwether of how the economy is performing amid higher interest rates.

Simon Rabinovich is our US Economics editor.

Has the Federal Reserve lifted rates enough to calm inflation without crushing growth? Has it gone too far or perhaps not far enough? Given how sensitive housing is to interest rates? It's one of biggest and first sectors to react to rate changes. It gives us tentative answers to these questions.

And so what are those answers? What's the housing market telling us?

Well, throughout last year, the market was giving us what was more or less the predictable answer, which was that as the Fed raised interest rates, housing activities slowed. So you went from a 3% rate on a 30 year fixed mortgage at the end of 2021 to more than 7% by October, the highest mortgage rates in more than two decades. And predict builders were staying on the sidelines. They scaled back new construction projects. Buyers pulled backs. Sellers began to trim prices. All of that was easily foreseeable. What was less foreseeable is what began to transpire at the start of this year, which was an early and quite largely unexpected rebound in the sector. In January, new home sales jumped to a 10 month high. Surveys looking at the confidence of both home builders and home buyers improved quite dramatically. America's biggest property developers reported more and more visitors coming to their showrooms. So a really unexpected rebound.

So that sounds like good news, at least for the property market, right?

It depends on where you're sitting. If you're a property developer, of course, you're happy to see demand coming back into the market. The case for optimism is that the housing sector has basically found a floor. Buyers are returning. But the kind of crazy buying frenzy that we saw during the peak of the pandemic is not. And this kind of rebound, so long as it doesn't get out of hand, you know, you could argue that it'll be a very good thing for the economy. It'll allow builders to resume construction activity which supports growth and you won't have a big run up in prices. So therefore you won't have big negative knock on consequences for inflation. But there's also a more pessimistic way to look at it, which is that the interaction between the property market and inflationary trends is simply too powerful to ignore. The housing market is very constrained in terms of its supply. As buyers return to the market, it seems almost inevitable that price rises will follow. And if the Fed sees that such a rate sensitive sector is not responding the way that you would expect tighter monetary policy, it may judge that it in turn needs to be more hawkish, needs to raise rates higher and keep them higher for longer. Unfortunately, I think the conclusion for America and probably for the world is that the pessimistic case does look a little bit more realistic.

Simon, how are developers responding to current economic conditions?

Well, I mean the developers responses have themselves been one of the reasons for the upturn in the market. At the start of this year they looked at the decline in buying activity and they began to offer a range of incentives to lure buyers back into the market. What they did this time, which is really quite novel, is what's known as buy downs of mortgage rates where they use their in house financing companies and they offer buyers mortgage rates which are well below the prevailing market rate. So for example, when the market rate was about 7%, there were developers that were offering 30 year fixed mortgage rates of as low as 4.5%. And they were able to do that by basically taking a hit on their profit margin and offering a discount to the buyers in the form of lower mortgage rates. It sounds great for buyers. Brought a lot of people back out of the woodworks. It's one of the reason that demand came back into the market. But there are two potential catches. Number one, if the value of the mortgage is below the market rate, in effect what it means is that the value of the house might be artificially inflated. If the home buyer turned around and wanted to resell that house, they would not be able to get the same price they had just paid for it. So they're immediately sitting on negative equity in their home. That's a concern. The macro concern, which is the Federal Reserve's concern, is that this is not the kind of activity it wants to see it's been raising interest rates specifically because it's trying. Trying to slow economic growth. It's trying to bring supply and demand back into balance. It's seen that housing affordability has worsened dramatically over the past couple of years because of rising prices and rising mortgage rates. The main thing that it really needs to see is a price correction to begin to deal with that lack of affordability. And what's being done by the developers is fighting against that correction.

So, Simon, how does housing supply look these days?

It's not great. I mean, there's two pools of housing supply. You've got existing homes on the market for resale. Those are running at about just a level of 1.1 million. That's roughly half the average since the late 1980s. The basic story there is that homeowners locked in really, really low financing rates over the past few years. They don't want to sell now because they would lose that financing if they moved to a new home. But the second factor is that home builders have been very, very, very prudent. Unlike a couple decades ago, even when there was the boom in demand during the pandemic, they didn scale up their building, and then with a slowdown last year, they scaled back quite quickly. That's been great for their balance sheets, but for the economy as a whole, it means that housing is likely to detract from growth. If you look at investment in residential construction, it fell by about a fifth last year. If the Fed does keep interest rates high, as it certainly seems likely to do so, it's quite likely that residential investment will fall even further.

And so, as this tussle carries on into the spring selling season, what are you going to be watching for?

Well, I think really have to kind of keep a focus on the fundamental question of sales activity and investment activity. Sales activity had been picking up, but as the Fed keeps rates higher, it's reasonable to expect that there will be a renewed slowdown in sales, which in itself would then translate into slower housing investment as well. The kind of decline in housing investment that we saw last year, if it continues this year, is the size that almost always has presaged the recession in the past. You know, if you look at consensus opinion in financial markets, it can be pretty flighty. You know, towards the end of last year, the general view is that recession was inevitable. At the start of this year, with the big rally in markets, the view was that actually maybe recessions are eminently avoidable. I think when you just focus on the housing sector, you come away with two basic messages. The number one message is that the Fed is going to have to take rates higher and keep them higher for longer in order to smother these kinds of unwanted rebounds in the housing market in inflation more generally. And then the second point is that when rates are that high, it is very likely to weigh on investment. As that happens, it will have a negative impact on growth overall. It's not going to be nearly as bad as two decades ago, but I think the housing market does serve as a clear warning sign that the economy does face a much tougher path ahead.

All right, Simon, thanks so much for your time today.

Thank you, John.

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China has invested massively into sports, and with great success. The country routinely excels at the Olympics in gymnastics, table tennis, badminton, diving, weightlifting, the list goes on. But one sport in particular has been a huge letdown.

The state of Chinese football can be described as absolutely dismal.

James Miles is our China writer at large.

China failed yet again to qualify to take part in the World cup competition. It was held late last year in Qatar. China has qualified only once. That was in 2002. It was knocked out then after losing all three of its matches without scoring a single goal. Now you've got another very dark cloud gathering over the sport in China. There have been a series of arrests at the very highest levels of the administration. It's by far the most sweeping campaign against corruption in Chinese football since China's leader, Xi Jinping came to power in 2012. And he's always had this ambition of changing the state of things so that Chinese football becomes a global sensation. He wants his country to become a football superpower by 2050. It's having a great deal of difficulty.

Getting started, seemingly so, not least because of these arrests so who's been apprehended here?

Well, the first high level target was Li Thier. He's the former head coach of the men's national team. He was arrested in November and then in January, two more people were seized, both either serving or in one case, a former high ranking person in the Chinese Football Association. And then the latest to be detained was Chen Xiuyuan, the football Association's president. He was detained on February 14 and the government said that he was being investigated for serious violations of discipline and law. That's often a code for involvement in corrupt activities. And there are rumours swirling on social media that other big fish, as people describe them, might be netted.

But netted for what exactly? What are these people accused of beyond the government idiom for naughty things?

Well, we don't really know. No details of the alleged offences have been released. It is the case that Chinese football is notorious for corruption involving match fixing, black whistles, as people call bent referees, doping scandals. These are quite commonly reported by state media, but we just don't know what's involved this time. Official media are describing this campaign as being as big, if not bigger than a huge one, that was conducted in 2009 and that led to the jailing of dozens of people or the banning of players from the sport. Several chiefs of the football association, referees, coaches, players imprisoned or otherwise punished. And it also prompted much soul searching about why Chinese football has been so plagued by these kind of problems.

So what was the outcome of all the soul searching? What's the problem?

The government unveiled a reform plan in 2015, and one aim of that was to remove officialdom from the sport, which seemed to be one contributing factor to corruption, this nexus between officials and business. So the Football association was cut loose, made much more independent. But clearly that didn't work. Chen Xiu Yuan, the person who was arrested in February, the president of the Football association, was appointed in 2019. He was the first businessman to get the job. But still he had some of the traits of an official. He set about reforming football in a way that many clubs resented. They were ordered to stop naming themselves after their sponsors. They were told to cap salaries, to stop paying foreign players such astronomic fees to join them. And these were blows to the football business, which has also been suffering from the effects of the zero COVID policies, which just ended in China in December. So dozens of football clubs have folded or are near collapse.

So it sounds as if the problem was then, and perhaps is now a matter of too much government interference. But still, even if that leads to corruption. It's not clear how much that corruption then leads to poor results on the pitch. Why does that connect to not being able to put together a good national side?

It's not entirely clear that clearing up corruption will really do the trick. Of course, China has waged war against corruption in football before. That clearly didn't have much impact in terms of the success of the Chinese men's team, I should say. It should be noted that the Chinese women's team, meanwhile, is doing pretty well. It's ranked about 14th globally by FIFA, whereas the men's team is ranked 80th. You could fill endless evenings with Chinese football fans about the root causes of Chinese men's football problems. Getting rid of corruption would clearly be a good start, but there are so many problems that it would be hard to be confident that simply cleaning up the sport would make that big of a difference.

Thanks very much for joining us, James.

Thank you, Jason.

When you hear the words read aloud in court they sound like a confession.

I'm praying that I hit hey this that slime shit fuck fuck the police fuck em in a high speed hundred.

Rounds in a Tahoe the defendant, Jeffrey Williams, is not usually having his lyrics read out in court. In fact, he's usually rapping these lines on stage as a Young Thug, a hugely popular rapper who's been nominated for Grammy Awards. But now he is standing triumphant.

I go h call that Ludacris.

Joshua Spencer is a news editor at the Economist.

He's also not the first rapper to have his lyrics used as evidence against him. There's actually been increasing trend of rap lyrics being used in trials across particularly America and Britain. Young Thug's case is perhaps the most high profile so far, and it raises issues of prejudice, free expression and racial bias in court.

So what does this particular trial relate to?

Prosecutors are arguing that ysl, the record label Youngstone Alife, is both a criminal gang and a record label. And it's not just charged Young Thug with crimes, it's also charged several other of his record label mates with crimes too. Several have taken guilty plea deals already, but several are standing trial and protest their innocence, including Young Thug, who denies criminal wrongdoing of any kind. Mostly, these cases tend to involve amateur artists, usually young black men, but they have involved several other high profile rappers before.

But rap music from the start has kind of been provocative, anti authority and so on. When did this trend of it becoming a court matter start?

When rap music first emerged in the 1970s, a lot of artists didn't really Mention crime. Some of the early tracks, such as the Sugar Hill Gang's Rapper's Delight, Had lyrics about chicken that tastes like wood. You also had rappers that wrote more socially conscious lyrics. So Grandmaster Flashes, the Message was a particularly seminal song with its descriptions of ghetto life. That all changed when gangster rap, a new genre, emerged in the 1980s.

Do you swear to tell the truth, the whole truth, and nothing but the truth?

Gangster rap would tackle some similar themes, but it would do it in a much more provocative way with songs such as NWA's Fuck the Police. They mentioned drugs and violence very openly, and they also began to go against the law. So they began to write songs that were openly critical of the police. When they did this, the law fought back. At first, when police fought back against rap lyrics, they were making the lyrics themselves a crime. There was a rap group called 2 Live Crew who were tried under obscenity laws in the 1980s, and their lyrics were not tried because they were too violent, but because they were sexually explicit with songs such as Me so horny.

Me love you long time.

This only made the music more popular. Gangsta rap became possibly the most mainstream genre of music in America in the 90s. The authorities had to find a different way to stigmatize rap if they couldn't ban it from the charts, which was to use lyrics as evidence in courtrooms. So Snoop Dogg actually was an early artist who had his lyrics used against him, and he had a song called Murder Was the Case, and the lyrics for that were read out in court in a very high profile trial.

And so combing through rap lyrics is now part of police work in the same way as it is combing through real crime scenes.

Since the late 2000s, there's been an explosion of rap music being posted online in American Britain. You now have police units, particularly in sort of London and New York, who look on social media for rap music videos or lyrics that mention violence or crime. In some cases, they are looking to kind of remove these videos from the Internet for inciting violence, and they are quite successful in doing that. But they also uncover lyrics or videos which are used as evidence by prosecutors in trials.

So the distinction here is not just people saying violent things, but linking themselves to real crimes in the real world.

That's correct. I mean, what prosecutors argue is they're not arresting young thug for his lyrics. They're arresting him for crimes that have been committed allegedly in Atlanta. Real murders, real thefts. But they are using his lyrics to kind of supplement their case that they're bringing against him. Because they argue and allege that these lyrics actually reference the crimes that have been committed.

But there must be some kind of pushback against using lyrics in this way. This is, in the end, an art form.

Incredibly high profile figures across America have in particular pushed back against it. Politicians such as Stacey Abrams have expressed their concern about this practice. And then a huge number of record labels, recording artists, are coming out protesting this trial in particular. So they actually wrote a joint open letter when the indictment was released, arguing that rappers are storytellers, and the trial really is an attempt to criminalize black creativity and black artistry. One point that they often make is that his lyrics are written from the perspective of a fake Persona, which is actually a common trope in rap music. So not everything that every rapper puts on a song is a reflection of real life or a crime that they've committed. But often these lyrics are presented as real or as facts in court.

It's tempting to think that rap is being singled out here. I mean, songwriters are storytellers. Generally.

Country music is replete with murder ballads, but it's very rare that you see a country music star arrange for that. Rap lyrics can really have a powerful effect, which suggests that they will be used more and more. A recent study demonstrated their power, showing that basically they put the same lyric in front of two groups of people. One group was told that the lyric was from rap music, and another group was told it was from country music. The group, given the rap lyrics, thought that the lyrics were more threatening and more representative of real life, despite them being the exact same. So these lyrics can have a strong effect, and that might lead them to be used more by prosecutors going forward.

Thanks very much for joining us, Josh.

Thank you, Jason.

That's all for this episode of the Intelligence. Let us know what you think of the show. You can get in touch@podcastseconomists.com and you.

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