Rising Housing Costs and Their Impact on Consumer Discretionary Spending

The relentless climb in housing costs has reached a tipping point, reshaping consumer behavior and forcing households to prioritize essentials over discretionary spending. With mortgage rates near 7% and shelter costs driving inflation, the financial burden on families is squeezing budgets—and investors must adapt. This article outlines which sectors will thrive in this environment and where to avoid overexposure.

The Housing Cost Crisis: A Double Whammy for Households

Rising housing costs are the linchpin of today's economic challenges. The Consumer Price Index (CPI) for shelter—a category encompassing rent and homeowners' equivalent rent—has surged 4% year-over-year, outpacing overall inflation of just 2.4%. Meanwhile, 30-year fixed mortgage rates hover near 6.8%, stifling affordability for potential buyers. The Federal Housing Finance Agency (FHFA) reports home prices rose 4% annually in Q1 2025, though regional disparities are stark: the Northeast and Midwest remain resilient, while Sun Belt markets like Texas and Florida face slower growth due to oversupply and affordability pressures.

Consumer sentiment, already fragile, has hit historic lows. The University of Michigan's index plummeted to 50.8 in April 2025, reflecting heightened anxiety over job security and economic uncertainty. With housing costs consuming a larger share of budgets, households are left with less to spend on non-essentials.

The Impact on Discretionary Spending: A Retreat from Luxury and Experiences

The math is simple: as housing costs eat into budgets, consumers cut back on discretionary items. Restaurants, travel, and luxury goods are feeling the pinch. The National Restaurant Association notes a slowdown in spending as families opt for cheaper home-cooked meals. Similarly, airline ticket sales remain below pre-pandemic levels, and luxury retailers like Tiffany or LVMH face tepid demand.

The Consumer Expenditure Survey highlights the shift: spending on “out-of-home” entertainment (dining, concerts) dropped 12% in 2024, while at-home entertainment (streaming, gaming) rose 8%. This trend underscores a broader move toward cost-effective alternatives.

Resilient Sectors: Defensives and Value-Driven Plays

Investors should focus on defensive sectors and industries offering affordability or necessity-driven demand.

1. Healthcare & Utilities: Steady as She Goes

• Healthcare remains a non-negotiable expense. Companies like CVS Health (CVS) and Walgreens (WBA) benefit from stable demand for prescription drugs and health services.
• Utilities (e.g., NextEra Energy (NEE), Dominion Energy (D)) offer regulated, predictable cash flows. Their stocks often act as inflation hedges, especially as energy costs rise.

2. E-Commerce & Value Retailers: The New Normal

• Amazon (AMZN) and Walmart (WMT) dominate affordable, convenient shopping. Their low prices and logistics efficiency shield them from budget cuts.
• Discount retailers like Dollar General (DG) and Costco (COST) thrive as consumers seek value.

3. Streaming & Subscription Services: Cheaper Entertainment

• Netflix (NFLX) and Disney+ (DIS) offer cost-effective alternatives to expensive outings. These platforms are increasingly seen as essential entertainment.

Sectors to Avoid: Luxury and Experiential Industries

• Luxury Goods: Brands like LVMH (MC.PA) or Coach (TPR) face declining demand as consumers prioritize essentials.
• Travel & Hospitality: Airlines (UAL, DAL) and hotels (MAR, HMC) struggle with tepid bookings and cost-sensitive travelers.
• Casual Dining Chains: Darden Restaurants (DRI) and Brinker International (EAT) see weaker traffic as families dine at home.

Investment Strategy: Shift to Defensives and Value

• Reallocate to Consumer Staples: Consider the Consumer Staples Select Sector SPDR Fund (XLP), which holds companies like Procter & Gamble (PG) and Coca-Cola (KO).
• Utilities ETFs: The Utilities Select Sector SPDR Fund (XLU) offers exposure to regulated, dividend-paying firms.
• Individual Stock Picks:
• Walmart (WMT) for its e-commerce dominance and affordable pricing.
• CVS Health (CVS) for healthcare essentials and pharmacy services.
• Netflix (NFLX) as a low-cost entertainment alternative.

Conclusion: Navigating a New Consumer Landscape

Rising housing costs are here to stay, reshaping spending habits for years. Investors ignoring this shift risk exposure to vulnerable sectors. Focus on defensive industries and cost-effective solutions to navigate the economic headwinds. Luxury and experiential industries may recover eventually, but for now, the smart money is on resilience.

Avoid overexposure to discretionary stocks and prioritize sectors that thrive in tight budgets. The next phase of this market isn't about growth—it's about survival.

This analysis is for informational purposes only. Always conduct your own research before making investment decisions.