- Pandemic era supply squeeze and the 22-23 monetary tightening hurt affordability.
- Mortgage rates have eased lately.
- Stock market rally has boosted the net worth of Americans.
- Household debt is at a 23-year low.
- With some policy support, some progress in cost of living can be made.
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Commentary: US housing market’s potential tailwind
Cost of living has been a major source of discontent in the US in recent years. Supply chain disruption and fiscal stimulus during the pandemic did not just push up the CPI, there was an attendant rise in property prices and rent as well. Monetary policy tightening during 2022-23 managed to bring down both CPI and property inflation to some extent, but affordability concerns have remained in the headlines. The recent off-cycle local government elections in US cities and states were dominated by such discussions. The US economy is marked by a great degree of heterogeneity; not all markets are unaffordable, and not all places have seen house prices flatline. But interest rates are largely uniform across the nation, and the wealth effect from the recent rally in stocks and bonds help all portfolios. With that in mind, we see a healthier housing market dynamic ahead, not one marked by yet another boom-bust cycle, but with a better supply-demand balance.
High mortgage rates and sticky prices had a chilling impact on residential transactions over the past few years, with unsold inventories rising. We think it is likely that transactions would begin to pick up in 2026. Mortgage rates have started to decline and may decrease further as the Fed continues to ease policy. US households’ affordability is improving for factors beyond lower borrowing rates. The S&P500 has gained 43% in value since the beginning of 2024, which constitutes a major wealth effect. On top of that, we note the household debt/GDP ratio, which, at 61%, is the lowest since 2002.
A healthier housing market does not mean a spike in house prices; it just means a more functional one, with serious buyers coming back to the fold, buoyed by lower rates and higher net worth. Lower rates may also help construction activity in some states, aided additionally by renewed policy vigour to boost housing supply. The US is far from resolving the cost of living crisis for many of its citizens, but the direction ahead with respect to home affordability could be a constructive one.
Taimur Baig
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