Welcome back to The Week in Review.

I hope you had a good week. This was a relatively quiet one on the news front, and I’m glad, since I was traveling. We got a weak GDP reading, some more signs that the US population is headed for a serious slowdown in the decades ahead, and a fresh print on new home sales. Read on for my views on each development, along with a roundup of fun stuff—it is the weekend after all.

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News: Q1 US GDP growth falls short of expectations
Views: Housing is the business cycle, and housing is strong

“Of the components of GDP,” wrote economist Edward Leamer in 2007, “residential investment offers by far the best early warning sign of an oncoming recession.” So we might look to housing (the investment part of it, specifically) to tell us whether the weak growth of the US economy in the first quarter is a sign of worse things to come.

In fact, housing investment was one of the bright spots in an otherwise lackluster reading. Look at the chart below, which breaks down national output into its constituent chunks, and shows the contribution of each to quarterly growth. The housing investment component of GDP—”fixed residential investment”—was the second most important driver of growth in the first 3 months of the year (after “services”, which is just a much larger part of the economy). This is a big change from 2022, when it was detracting from growth.

Leamer’s paper was called “Housing IS the Business Cycle”. Housing is telling us that the business cycle, despite this weak reading, isn’t headed for a recession anytime soon.

Edward Leamer, Housing is the Business Cycle, here ◎
Housing is hugely important for growth, but not for the reasons you think, here ◉

News: The number of US births dropped to the lowest since 1979
Views: Fewer people need fewer houses

What drives demand for housing? In the short run: incomes. In the long run: demographics. So, this week’s data from the CDC showing that only 3.6 million babies were born in the US last year—the lowest in 45 years—has important implications for the housing market.

Low fertility translates into low long-run population growth. By the 2050s, the Census Bureau forecasts the population inching higher by a mere 350k per year—not far off where it fell to during the depths of the pandemic. In fact, if it weren’t for immigration, the American population would begin to shrink in 2038.

The slowdown in population growth—alongside the aging of the population—will have enormous consequences for the housing market. It could potentially alleviate some of the supply shortage that’s driving prices out of reach. But be careful what you wish for: a slowing national population growth means that some regions will experience an outright shrinking of their population, and this could have some painful economic effects.

Next week, I will publish a deep dive into demographics and what this means for the future of housing demand (for paying subscribers only; upgrade your subscription here).

We wrote about the outlook for population growth earlier this week, here ◎
Low growth could cause urban-doom loops. We spoke to professor Arpit Gupta about this happening in New York, here ◉

News: New home sales rose, but prior data revised down
Views: It’s neither the best of times—nor the worst—for builders

New home builders were one of the enormous beneficiaries of a lack of supply in the existing home market throughout the pandemic. New homes were selling like hotcakes. Inventory barely covered a few months of sales. It helped that builders could help buyers absorb rising home prices by subsidizing their mortgages through “buy downs.” Homebuilder sentiment surveys at the time showed the highest readings in at least 40 years.

Conditions are tougher today. There are more existing homes sitting on the market—a growing source of competition for new homes. Mortgage rates are back above 7%. The construction side is dicier, too: banks have tightened lending standards for loans to builders. The supply/demand imbalance has flipped—inventory covers more than 8 months of sales (much higher than usual). Home builder sentiment is back to neutral.

Still, the latest data shows that the new home market is doing just fine. In March, new home sales rose almost 9% over the prior month—far above the consensus forecast of +1%. Prices are lower than a year ago, but most of this stems from builders selling smaller units, rather than cutting prices. In fact, prices have been rising over the past few months as fewer builders are offering price cuts. If the economy continues to perform and mortgage rates subside—my base case view—then new home sales will rise further and builder sentiment will recover, even if it won’t be like the glory days of 2020 anytime soon.

• Mechanical keyboards! Remember in the olden days, keyboards made a satisying ‘clunk’ sounds every time you pressed a key? Then we got laptops, and typing got less tactile—and quieter. A few weeks ago I looked into getting a “mechanical” keyboard—the old-school kind that was so nice to type on. It turns out, a lot of people are crazy about mechanical keyboards. It’s a deep rabbit hole, with its own vernacular: switches, key caps, double-gasket design, etc. People are passionate about how they sound. I could go on. If you’re intrigued, I am very happy with my Logitech MX Mechanical Mini for Mac Keyboard (not an affiliate link! I’m just weirdly evangelical about neat gadgets).

• How bad are phones and social media for kids, really? If you believe Jonathan Haidt, very bad! I really enjoyed listening to this interview where Tyler Cowen speaks to Haidt about his view that social media is the best explanation for the deterioration in teen mental health, and that phones should be banned in schools, here ◎. Let me know if you found his argument convincing.

• Knox Goes Away. I’ve been using Metacritic for years—it summarizes the variety of critic reviews of films (and music, games, etc) into a single number, out of 100. The score of 54 it gives the 2023 thriller, Knox Goes Away, directed by and starring Michael Keaton, for example, is pretty bad. But I watched it anyway because a relative did the set decoration. It was in fact such a good movie that I investigated how Metacritic works. Turns out, in boiling reviews down to a single number, their algorithm weights outlets like The Hollywood Reporter as heavily as those like The New York Times. Bottom line: Metacritic sucks, and Knox Goes Away is an excellent film.

Next week, I will publish a deep dive into demographics and what this means for the future of housing demand (for paying subscribers only; upgrade your subscription here). Have a great weekend!