- Pandemic-induced disruption to home construction has largely abated.
- Housing completion has picked up, offering some relief to tight supply.
- Fixed term mortgage rates are high, but hybrid products still offer sub-6% home loans.
- US households’ debt ratio has declined sharply since the GFC.
- Their debt service ratios are also manageable.
Commentary: Resiliency of US housing market
The US housing market, accounting for more than 15% of GDP, has displayed a great deal of resiliency over the past couple of years through substantial monetary policy tightening. Latest data suggest a 6%+yoy increase in residential home prices nationwide, comfortably placing them at all-time highs. By many metrics, the housing market continues to look healthy, although the fear with monetary policy tightening was for the market to take major tumble, along with consumer balance sheets. That has not been the case in this cycle. The housing market has come a long way since the volatility incurred during the onset of the 2020/21 coronavirus pandemic. Over the last three years, the market has become functional with transactions, constructions, completions, and new homes for sale settling at around their long-term trend. This reflects normalisation of construction equipment and material supplies, all of which were highly disrupted by the pandemic. Consumer attitude, which had temporarily shifted overwhelmingly toward suburban homes away from city centres, has also begun to normalise.
Home occupation and vacancies have gone back to the pre-pandemic trend. The slight rise in vacancies in recent months reflects the rise in construction and completions in the past couple of years. This is a positive development, in our view, easing some of the supply crunch seen earlier in pockets of the country.
Going forward, barring any price shocks, the housing industry is likely to continue to proceed with starting (and completing) new home construction projects. As the supply crunch abates, the record prices seen lately may level off, giving some breathing space for prospective home buyers.
All this is taking place when the cost of financing a home mortgage has risen to levels not seen in decades. While home construction has picked up, sales of existing home is constrained by high mortgage rates, as those considering selling are stymied by the fact that they will have to swap their prevailing low-cost mortgage with a high cost one to finance their next home.
Unlike consumers elsewhere, US homebuyers have an extensive range of mortgage products to choose. In addition of fixed rate long-term mortgages, a rarity elsewhere in the world, US consumers can obtain hybrid products that offer a rate that is fixed for three to five years and variable thereafter. Often these rates are less than 6%, representing a truer reflection of borrowing rates than what the headline long-term fixed mortgages suggest.
Beyond the issue of new home purchases, what about the cost of servicing existing debt? That’s typically a key channel of monetary policy transmission, with higher rates affecting demand as leverage becomes more costly.
This is where the post-GFC deleveraging comes to the rescue. Over the past decade and a half, despite all the talk about crushing student loans and other borrowings, total household debt of Americans as a share of the GDP has declined from 85% to 63%. With much of this debt in fixed-rate home mortgages, the US households’ ability to absorb a high interest rate cycle has seldom been this strong.
This shows up in the manageable debt service metric of US households. High rates come with pain and act as a break to consumption, no doubt. But the US residential housing market appears well positioned to remain stable, given the fundamentals with respect to construction trend and debt service ability.
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