The drop in demand does not prevent increases in housing prices in the US. The culprits are high interest rates, limited supply and the reluctance of owners to grant new mortgages. To unravel the unusual dynamics of a market often regarded as a barometer of US economic growth, it is worth rethinking traditional expectations about how interest rates affect interest to housing supply and demand.
On the one hand, the volume of sales has dropped a lot. “He’s hit rock bottom”claims Glenn Kelman, CEO of Redfin real estate agency, and adds that the only ones who move home are those who “have no choice but to do so.” On the other hand, prices remain high, especially in markets with a shortage of brick available, where Bidding wars are still the norm and it’s hard to find good bargains.
If a year ago they had told the economic agents that the Federal Reserve would raise the federal funds rate by more than 5%, but that home prices in United States would fall only marginallyThey probably would have thought it was something out of science fiction. But that is exactly what has happened. According to National Association of Realtors, Existing home sales in the North American country are down almost 17% since last July. However, the costs, measured by the index S&P CoreLogic Case-Shiller US National Index, only down 1.7% since last May.
Normally, we would assume that a higher interest burden would deter home buying activity. But demand has remained surprisingly robust, boosting the US economy more than many would have expected. “In its efforts to rein in rising inflation, we believe the Federal Reserve raised rates so rapidly that tightening monetary policy tightened the supply of existing homes more than it curbed demand, contributing to today’s stubbornly high prices in day”, comment Eric Winograd and James T. Tierney, AllianceBernstein analysts.
When the best strategy is to stay still
How has this happened? The average interest rate on a 30-year fixed-rate mortgage has went from 3.1% at the beginning of 2022 to the current 7.6%. Comparing median home prices in early 2022 with current ones—and assuming a 20% down payment—results in a monthly difference in interest expense of about $1,200 per month. few people want to move out of their current homes and forego low-interest mortgages, only to buy more expensive properties at higher rates.
Meanwhile, chronic construction shortages have aggravated already tight supplies, which remain well below previous levels to the pandemic. The net effect has been a downward shift in the supply curve, putting pressure on existing home sales. In a way, US housing can be viewed through the same prism as other sectors experiencing supply chain disruptions. “We see parallels with the automotive market American, who saw how the chain’s problems Supply chains were tightening inventory during the pandemic, inflating the prices of new and used vehicles,” Winogard and Tierney say.
The Manheim Index of Used Vehicle Value has shot up 65% from pre-pandemic levels through 2021. Since then, it has fallen 17%, with a downward momentum. The turning point came when the auto industry ramped up production and began to replenish depleted inventories. “We think the same thing will have to happen in the US real estate market for prices drop significantly“, say two experts.
Given the mixed signals, what can we expect for the housing market in the coming years? The reality is that a lot depends on monetary policy. Interest rates – and, by association, mortgage rates – are about to peak in the US and will eventually stabilize near current levels. “With rates still high, we don’t expect a dramatic increase in home buying, but we don’t expect a significant weakening in demand either,” say Alliance Bernstein analysts. As in the last two years, the crux of the matter will be the offer. Given long-term inventory constraints, the US housing market needs rate stability to see construction activity pick up.
A greater supply of housing could contribute positively to economic growth, while preventing rising house prices from disrupting the overall disinflation process. If rates don’t go up much more – or if they don’t fall sharply – the housing market could contribute to the relatively soft landing that we currently forecast. Meanwhile, the housing market could be expected to challenge historical norms. As cities recover its equilibrium and core inflation cools, house prices could remain high, even if the volume of sales does not impress. Ultimately, the Federal Reserve and homebuilders could hold the keys to the American dream.
2023-09-06 02:39:46
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