Moves over: American house prices

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Hello and welcome to the Intelligence from the Economist. I'm Jason Palmer.

And I'm Ora Ogumbi. Every weekday we provide a fresh perspective on the events shaping your world.

Egg freezing is supposed to to give women the opportunity to delay having children. Their fertility is, well, frozen in time, but as yet, there's not much data on how successful it is. We pick through some of the best numbers that are available.

And our obituary's editor remembers Isabel Crook, the Canadian anthropologist who saw the founding of the Chinese Communist Party and became an ardent supporter of its cause despite its horrors. But first, Home ownership is a cornerstone of the American dream, but it has rarely been harder to attain than today. Those looking to enter the property market face costly mortgages and limited choice. They also face high property prices, despite changes from the Federal Reserve.

Interest rates now the Fed will raise rates by a quarter of a percent in line when it takes the Fed's.

Key short term interest rate to its.

Highest level in 22 years continues to.

Signal the possibility of future rate hikes.

It says it's going to be In.

July, the Fed raised interest rates yet again for the 11th time since March 2022. In that time, that bank rate has gone from near zero to more than 5%. And according to Chairman Jerome Powell, there may well be more hikes on the horizon.

We are prepared to raise rates further.

If appropriate, and intend to hold policy.

At a restrictive level until we are.

Confident that inflation is moving sustainably down toward our objective.

Such rate jumps would normally address at least one of the problems facing prospective homeowners cost, even as it makes loans harder to come by. But while the property sector is usually sensitive to interest rate changes, the US Housing market remains stubbornly buoyant.

Interest rates in America have gone up quite dramatically, and that has pushed mortgage rates to their highest in four decades.

Simon Rabinovich is the Economist's US Economics editor.

Normally you would think that would reduce house prices. In fact, just the opposite has happened. Prices have been rising this year back towards record highs, and for anybody who's trying to get into the housing market, it's damn near Impossible.

And normally when interest rates rise, house prices tend to fall. Why is that not happening this time?

Well, as you say, I mean, the normal expected relationship is that as mortgages go up, you would think that housing prices would come down. Just to give you a sense of how expensive mortgage costs are now, today, just a few years ago, the average monthly mortgage payment was about 14, 15% of the average monthly income. That's now closer to 29%. So it's more than a doubling in the space of three years. And of course, housing prices themselves have not come down. And the reason for that really is that what's happened is that you've had a big freeze in the housing market. A lot of people locked in very, very low rates over the past number of years. In America, mortgages tend to be for extremely long terms, you know, fixed rates that last for roughly 30 years. And so nobody wants to sell their house, because selling their house would imply that you're giving up your sweetheart deal of a mortgage and shifting to a mortgage rate that's twice as high. So the volume of sales of existing homes has gone down quite dramatically. So the invent of available housing is much lower than it was a couple of years ago. So demand is down, but supply is down by roughly an equal amount.

And usually you'd expect all this to have a dampening effect on economic activity. Is that happening?

Well, so yes and no. It's actually quite complicated in the sense that you're right that if housing transactions are down, you would normally think that that would then have a negative broad consequence for the economy. But in fact, two different things have compensated for that downward shift. So number there's been a lot of spending on remodeling. People who may have wanted to sell their homes and perhaps upgrade instead of upgrading their home in place, they're spending a lot of money on remodeling, upwards of about 500, $600 billion a year for the economy as a whole. That's roughly 2% of GDP and is 40% higher than what was registered back in 2019. The second effect is that the existing home market is in a state of suspended animation. But the new build home market has actually been doing a lot better. So you still have developers, house builders that are buying up land, that are building lots of new homes because there's so little competition from existing homes on the market. They're actually doing pretty well. So if you look purely at housing construction, that has actually rebounded fairly strongly over the past year. So the macroeconomic consequences of the freeze in the housing market have actually been reasonably positive.

And Simon, why are new builds doing so much better even in this difficult market?

So the first factor, as I mentioned, is that simply there's availability. If you look at the overall inventory of the housing stock, what is on the market for people to buy? New build homes typically are roughly 10% of the market. Over the past year, they've been about one third of the market. So there's homes that people can buy. But the second thing is that the home builders have actually been really aggressive with offering kind of a range of incentives to home buyers. And by far the most popular of these incentives is that they themselves have been lowering mortgage rates. They've been what's called buying down mortgage rates, basically prepaying a certain percentage of the mortgage and then offering a lower rate to the home buyers. So over the past year, the, say the average mortgage rate was about 6.5%. But if you were purely buying a new home, you, you could actually be getting a mortgage rate of 5%. Now the reason that the home builders were able to do that is that they have really strong balance sheets. A lot of them locked in cheaper financing early on in the pandemic. Because house prices are up, they have pretty hefty margins. So from their perspective, it's basically like a discount on the home price, say a 5 or 6% discount for the home buyer. It looks like a really, really nice mortgage rate, especially relative to what they could get on an existing home. So a lot of activity moved from the existing home market to the new home market.

So that seems like a short term solution, basically offering discounts to manage demand. Is that going to be viable in the long term?

Well, the higher that mortgage rates go, the less viable it will be. You know, if you just think of it in terms of the discounted mortgage rate. So say they were able to offer a 5% mortgage rate when mortgage rates for the economy as a whole were closer to 6.5%. Well, now mortgage rates for the economy as a whole are going up to about 7.5%. So the discount mortgage rate that the home builders can offer is also going up. And at 6%, there will be less demand than there was at 5%. And you know, as far as the sustainability for their balance sheets is concerned, you know, at some point the margin compression does also begin to become a problem for them. So I think they've been successful up till now in propping up demand, but that's going to be harder going forward. And also to the extent that they are successful that home prices don't fall. That's going to be a concern for the Federal Reserve.

How so? What do you mean?

Well, the big underlying concern for the Fed is how does the property market activity interact with inflation more generally. Now, it's a kind of complicated relationship. You know, people often think about home prices equating to inflation. In fact, if you look at inflation indexes, it's not the price of homes that are being purchased, but it's actually the rental level, which is incorporated into the, the inflation indexes. Rents have come down over the past year that is actually feeding through into inflation with a lag. That's a very good thing. But the tighter that the housing market is, the harder it is for people to buy homes. The more expensive new homes are, more people will be pushed into the rental market. So there's a lag with all these things. But you would expect that the resilience in the property market and the rising house prices will eventually feed through into rising rents as well. And that in turn will feed, feed through into inflation. So I mean, of course the Fed does not want to see a collapse in the housing market, but they also don't want to see a strong rebound, especially when housing prices are as high as they currently are. So this does complicate the inflation path for the Fed and I think we'll see some of those complications later next year.

And so what do you make of this resilience in housing? Is it going to last?

Well, I think at the highest level, if you look at it, it really is quite remarkable that the housing market has been as resilient as it has been despite having four decade highs in mortgage rates. For people who are trying to get into the housing market, for couples who are trying to buy their first home, it's an incredibly frustrating period. Housing affordability is the worst it's been since 1985. And of course the Fed is concerned about whether or not this resilience will make its job in tackling inflation that much more difficult. I mean, of course nobody in their right mind wants to see a property crash in America, but a little bit of softness would be very welcome.

Simon, thank you so much for your time.

Thank you. Ora.

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Psst. Hey, Psst. Do you want to make a small amount of cash? We're doing some research to help us continue to improve our shows and looking for listeners to participate, particularly those who haven't filled in one of our surveys before. We'll be keeping in touch with you via WhatsApp over eight weeks, and then it's payday, a modest one. Help us out by clicking the link in the show notes. A decade or so ago, commercial egg freezing companies began offering women more control over their fertility. It seemed that through technology, women could overcome a time limit on having children that's imposed by the finite number of eggs they have at birth. Freeze now, IVF later was the idea, but it's only now becoming clear just how much the technique is delivering on its promise.

As part of a big look that the Economist took into ivf, I was particularly interested in the largest American study on elective egg freezing to date, which was published last year.

Erica Shin is a researcher for the Economist.

In that study, researchers found that 39% of the women they observed were able to have at least one baby using the eggs that they'd frozen, which may have involved multiple attempts over the 15 year period.

So before we talk about this study and what it found, talk us through the process of egg freezing.

So egg freezing is a lot like the first part of what IVF treatment is like. So what happens is women will take daily hormone injections to BO of eggs capable of being fertilized, which are then removed from the ovaries using a needle, dehydrated and frozen. These frozen eggs will then be thawed at a later date, fertilized, and then the embryo will be implanted into the womb.

And as a procedure. How common is that?

Egg freezing only really went mainstream about 10 years or so ago. It was considered experimental in the US until 2012 so relatively few women have tried egg freezing, and the data is limited. Even fewer women have thawed their eggs, which also makes it kind of hard to know how common or successful it is. And most research also doesn't differentiate between elective egg freezing and egg freezing done for medical purposes. So, for example, women who are going to have to undergo chemotherapy, who may want to freeze their eggs in case they want to use them later. So that lack of differentiation could also skew results.

And so, in that sense, with a small numbers problem, how valuable is this study?

This study, which was done by researchers at New York University, only observed 543 patients at just one fertility clinic in the city. But their paper stands out because it followed real clinical outcomes for almost two decades, whereas most other studies are based just on mathematical modeling.

So we have this headline figure of a 39% success rate, but what else caught your eye in this study?

So the current data suggests that there are two important factors when it comes to egg freezing. The age at when you freeze your eggs and the number of eggs stored. If a woman first froze her eggs before she was 38 years old, she had a 51% chance of at least one live birth in this study. And if she thawed at least 20 eggs, then the chances went up to 70%. But for a woman who first froze her eggs when she was 41 years old or older, the success rate was only 23%. Although if she thawed at least 10 eggs, the success rate went up to 33%.

And how does this one compare with the other studies that you mentioned?

There are other studies, including one on elective egg freezing that was conducted in Spain, as well as an analysis of countrywide data in yielded similar conclusions. If you look at it one way, the odds of having a baby from frozen eggs aren't especially high. But those chances can look stronger when you put it in other contexts. There was a report published in the UK in 2018 that suggested that at 18 years old, a woman had a 25% chance of conceiving naturally every month, but by the time she got to 35, that chance would fall to 10%. But for women who freeze their eggs, the age at which they use them and the length of time that they remain frozen seems to have no impact on their success rate.

I mean, objectively, 39% success rate is not that big a number. It suggests that there's nothing like a guarantee of prolonged fertility here.

Yeah, definitely. So, looked at one way, those odds really aren't high, but they are stronger in certain contexts. There's a real concern that demand for egg freezing is from a belief that it's a fail safe. But people have to remember that being able to start a family is never a certainty. What egg freezing offers instead is a slowing down of the rate at which it becomes harder for hopeful mothers to conceive.

Erica, thanks so much for your time.

Thanks for having.

The best moment of Isabel Crook's life came on October 1, 1949, when she was at the occasion of the founding of the Chinese Communist Party.

Ann Ro is the Economist's obituaries editor.

It took place in Tiananmen's Square, the presence of Mao and all the Communist leaders, with huge crowds and processions that went on for six hours of both civilians and soldiers. She and her husband David were some of the very few Westerners there. She thought she had never seen anything as joyful as that moment. Her cause, her great overriding passion, was communism. She had always wanted to have a cause in her life as she was growing up, hadn't seemed to find it in religion or anything else. But she'd started to read books about Marxism and communism, eventually met David Crook, who was an ardent Communist. He was actually a spy for the Soviet Union and had also fought with the Republicans in the Spanish Civil War. So from then on she was utterly caught up in his own passion. She was Comrade Isabel to everyone. She studied anthropology at Toronto University and went back to China to do her fieldwork in remote villages in Sichuan Province in the Far West. And when she did this fieldwork, she really became Chinese to all intents and purposes. She would sleep on a brick bed, she would wear homespun clothes, eat as the Chinese ate. Just adore being in a Chinese village, living that life with the people. When she did her fieldwork, China was being run by a Nationalist government and Japan had just invaded. The Nationalist government was looking pretty weak, but it was trying to carry out agrarian reforms. She looked at how the reforms were going and found that the Nationalist government was really not managing to get anything to work at all there. First of all, it was press ganging the men to try to go and fight the Japanese. It was also imposing swinging taxes on farmers who simply couldn't afford it. Her studies had been interrupted by the Second World War, but she and her husband had come back to live in China, and she went to a village called Ten Mile Inn to investigate how it would look now that the Nationalist government was on its last legs and it was now the Communists who were in the ascendant and the people's Liberation army, under the ultimate leadership of Mao, were gradually taking over the country and freeing village after village. And she helped to enhance the revolution by going out and harvesting or hoeing the fields. All this activity did raise the question of whether the studies she was producing, which were very carefully produced and on the basis of lots of interviews and gathering of data, whether those reports were really worth anything if she was so committed to one side. But in general, she didn't notice any of the horrors that the outside world did. The Cultural Revolution, for example. Even though her husband David was actually arrested and held for five years in jail by the young students and toughs who were promoting the Cultural Revolution, she didn't hold it against the government and nor did she hold against them the fact that she was under house arrest for much of that time. As David had said to her, if you're suffering from a long lingering disease, wouldn't you rather have a fairly violent operation than go on suffering? So she would always support the Cultural Revolution and say she found Hauser rest rather restful and useful. She managed to study volumes one to four of Mao's complete works and found he had a great sense of humor. She was possibly more worried as the years went on by first of all the protests and demonstrations in Tiananmen Square in 1989. She did protest about those, as her husband did, and they took plastic sheets and bottled water to the students in the school and wrote to the People's Daily, appealing to the government not to use force against the students, which of course the government ignored. She was perhaps just as bothered, though by the direction China went in, especially in the last decades when she was there, when, after Deng Xiaoping's reforms In the late 1970s, China became a rip roaring capitalist and enterprising country when it began to become the great producer of goods for the world and the people began to care a good deal about consumption and generally becoming rather Western in their love of money and enterprise. She was bothered by capitalism, which she could see running riot in China. And yet, when she came to think about it, perhaps China had simply under Mao, built its house with the stones that were there, used what it had and the needs of the people at the time to change the way it was run. And by the time the 1970s had come along, in fact, there was a need for something different in China, different stones to build a different house. And that was the way she could justify it to herself. She was still absolutely intent to give China whatever its people wanted and wherever its people or wherever the party told her to go, then she would go there and do what she could to.

Help Ann Ro on Isabel Crook, who has died aged 107.

That's all for this episode of the Intelligence. The show's editors are Chris Impey and Jack Gill. Our deputy editor is John Jo Devlin and our sound engineer is Will Rowe. Our senior producers are Sam Westrin and Rory Galloway. Our senior creative producer is William Warren. Our producers are Alize Jean Baptiste, Kevin Kaynors, Barkley Bram and Sarah Larnyuk. And our assistant producer is Henrietta McFarlane. Extra production help this week from Maggie Khedifa and Benji Guy. We'll all see you back here on Monday.