- Home sales strong despite mortgage rates rising 40–50bps since March.
- Tight supply and rising prices have kept the post-pandemic sellers’ market going.
- Strong jobs and wage growth are supporting household earnings and spending.
- Equity gains, driven by the AI wave, are boosting wealth and helping consumers absorb costs.
- Higher rates and costs, and sky-high stock prices pose growing risks.
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COMMENTARY: RISING RATES AND US HOUSING MARKET
US housing market has been resilient despite rising rates. Mortgage rates have risen by 40-50bps since March, and yet, May home sales were up 3.2% saar. Inventories are falling and prices are still rising. The sellers’ market that had transpired after the pandemic is not quite over yet.
Housing-related investment and services add up to 15-16% of US GDP, so their role is critical in assessing the outlook of the US economy. High cost of ownership, owing to high mortgage rates, tight supply, and rising cost of housing inputs, have not had a material impact on the housing market. We believe two factors have played in this dynamic.
First, the labour market. Some misgivings about AI-disruption and a decline in public sector and goods sector jobs notwithstanding, overall jobs figures and unemployment trend have remained favourable. Helped by sustained strength in the private services sector, low-4% unemployment rate and mid-3% wage growth have kept earnings and spending largely intact.
Second, equity markets. Wars, inflation, trade related volatility, fiscal weakening, fading expectation of monetary accommodation, nothing has managed to stem the relentless rise in US stock prices. The AI rally has pushed up retirement and personal wealth accounts substantially, unleashing a powerful wealth effect. Consumers may be unhappy with the state of geopolitics and attending uncertainty, their inflated pocketbooks are still allowing them hold on to their properties, service their debts, made bids for new places, and get on with renovations.
Still, home sales would not remain impervious to market fundamentals. Further rise in interest rates and further inflation surprises would surely dent sentiments. An equity market correction could spoil the party as well. US housing market has so far eluded the gravitation pull of higher prices and interest rates. There is a limit of that. Risks to housing’s contribution to economic activities go beyond the sales outlook. Home renovations could slow in response to rising costs, ranging from building material to home appliances to availability of blue-collar workers amidst immigration crackdown. They could also get in the way of new home construction. We will keep monitoring the gap between headwinds and resilience.
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