The Fed's rate hike cycle has both hit housing demand and dampened it**. The U.S. housing market may improve slightly in 2024, but it will be difficult to enter a new boom cycle, with mortgage rates expected to fall, home sales to be modest**, existing homes** to improve, and home price growth to near zero.
The special author of this journal is Ye Bingnan.
The U.S. housing market in 2023 is characterized by high interest rates, high home prices, low sales volumes, and low **. The current Fed rate hike cycle has both hit and suppressed demand in the housing market, and has not led to a significant increase in housing prices** and mortgage credit risk, but has triggered market risk for long-term credit assets. How will the U.S. housing market develop in 2024?
Key features of the U.S. housing market
In 2023, the U.S. housing market will be characterized by high interest rates, high home prices, low sales and low sales.
First, U.S. mortgage rates have risen sharply, the highest since 2001. After inflation hit a more than 40-year high and the Federal Reserve raised interest rates aggressively, the 30-year fixed-rate mortgage rate rose from an average of 3% in 2021 to more than 7% in the second half of 2023, significantly exceeding the 2013-2019 average of 4%.
Second, U.S. home prices continued**, with the house-price-to-rent ratio and house-price-to-income ratio hitting record highs. The S&P CS Home Price Index has skyrocketed by 31 percent from 2020 to 20215%, with a cumulative total of **5 in 2022 and the first 10 months of 20237% and 39%。The house-price-to-rent ratio and house-price-to-income ratio index according to the OECD reached 139 in the second quarter of 2022, respectively1 and 121An all-time high of 9, which fell slightly to 133 in the third quarter of 20231 and 1189. Still exceeding the 2005-2006 historical peak of 1262 and 1188。
Third, U.S. home sales have fallen to low levels. In the first 10 months of 2023, the total annualized sales of new homes and existing homes were 4.84 million units, down 184%, significantly lower than the 6.69 million units in 2020-2021 and the 5.97 million units in 2015-2019.
Fourth, there is a shortage of existing homes in the United States. Existing homes accounted for more than 80% and 70% of housing sales and **, respectively, with existing home inventory falling from 1.74 million units in 2019 to 1.06 million units in the first 10 months of 2023, and the average monthly number of months available for sale increased from March 20199 months to 3 in the first 10 months of 20231 month, which is much lower than the 5-6 months corresponding to the equilibrium state of the market. However, the average monthly number of new homes for sale and the number of months available for sale increased from 330,000 units in 2019 to 58 months rose to 430,000 units and 77 months.
Supply and demand are suppressed
The impact of this rate hike cycle on the U.S. housing market is very different from previous cycles, with the sharp rise in interest rates from ultra-low levels not only hitting demand but also suppressing **, which has not yet led to a significant increase in housing prices and mortgage credit risk, but has significantly increased the market risk of long-term credit assets.
The dampening effect of interest rate hikes on housing demand has been repeatedly demonstrated in previous cycles. Housing demand is very sensitive to changes in interest rates because it is backed by debt, and rising interest rates reduce the purchasing power of housing. Due to the surge in house prices in 2020-2021 and the sharp rise in interest rates in 2022-2023, the housing purchasing power index fell from an average of 160 in 2015-2019 to an average of 93 in the third quarter of 20235 The lowest since 1986. Assuming a down payment annual fixed-rate mortgage to buy a new home with a median selling price, the monthly payment as a percentage of median household income rises from 22% in 2021 to 34% in the second half of 2023.
It's not often that interest rate hikes have a dampening effect on housing**. This round of interest rate hikes was preceded by an era of ultra-low interest rates, with a large number of homeowners replacing their mortgages with fixed, low-interest loans. After this round of interest rate hikes, the interest rate of new mortgages has risen sharply to more than 7%, but the interest rate of existing mortgages is still low, and the effective interest rate of existing mortgages in September 2023 is only 374%。A large number of homeowners are locked in low-interest rate stock mortgages and are unwilling to sell their houses for replacement, forming a "golden handcuff effect", resulting in a shortage of existing houses. According to a survey by market institutions such as Zillow, the cut-off value of mortgage interest rates in the minds of many potential home buyers is 5%-55%。The shortage of existing homes** on the one hand restricts housing sales and pushes up housing prices, and on the other hand, it prompts more housing demand to shift to the rental market, pushing up the rent level. After this round of sharp interest rate hikes, the increase in house prices and rents, although slowed, has not yet been noticeable**.
Fixed-low-rate mortgage contracts reduce the impact of the rate hike cycle on household balance sheets and financial health, but increase the impact of the rate hike cycle on bank balance sheets and financial health. Although the Fed has raised interest rates by 525 percentage points, but due to the existence of a large number of fixed-low-interest mortgage contracts, the effective interest rate on existing mortgages in the third quarter of 2023 increased by less than 1 percentage point compared with 2021, and the household debt service burden ratio increased from 8.0% in 20219% only edged up to 97%, close to 2019 levels, but significantly lower than 13% in 2007. Fixed-low interest rate mortgage contracts result in a loss in the value of the bank's or MBS investor's claim, as the fair value of the existing mortgage or MBS at the higher market rate is significantly lower than the historical book value. While the current rate hike cycle has not significantly boosted mortgage credit risk, it has significantly increased the market risk of loan assets.
The U.S. housing market is struggling to enter a boom cycle
The housing market may improve slightly in 2024, but it will be difficult to enter a new boom cycle. Mortgage rates are expected to fall back but remain restrictiveHome sales may be moderate**, with new home sales likely to perform better than existing homesExisting houses** will improve, but they will still be on the tight side;House price growth is likely to be close to zero.
Mortgage rates will fall back as the economy slows, inflation falls and the Federal Reserve cuts interest rates. The median value of US GDP growth and PCE inflation in the Bloomberg survey is 24% and 38% to 1. in 20242% and 25%, and the Fed will cut interest rates by nearly 1 percentage point in 2024. The author expects that the decline in US GDP growth and PCE inflation in 2024 may be greater than that of the market, and the Fed may cut interest rates by 1 in 2024Around 5 percentage points, the 30-year fixed-rate mortgage rate could rise from nearly 7 percent in the fourth quarter of 20235% to 6%-6 in the fourth quarter of 20245%, but it is still at a restrictive level.
U.S. home sales or moderate**. Driven by lower mortgage rates, improved existing homes** and higher employment income. New home sales and existing home sales are expected to grow at a rate of 52% and -215% rebounded to 7% and 4% in 2024. A 1 percentage point drop in mortgage interest rates will boost the purchasing power of homes, thereby stimulating home sales, and a 1 percentage point drop in mortgage interest rates will reduce the monthly mortgage payment to median income ratio by about 3 percentage points. The decline in mortgage interest rates will alleviate the "golden handcuff effect", improve existing homes**, and benefit housing sales. Employment and household incomes are likely to continue to grow, but at a slower pace. In recent years, the number of homebuyers of the appropriate age has continued to rise, with an average annual increase of 640,000 people in the population aged 25-44 from 2018 to 2022, exceeding the 140,000 in 1991-2007 and 280,000 in 2008-2017, supporting housing demand.
House price growth is likely to be close to zero. Because the improvement space is greater than the demand. Household financial stress is likely to rise due to increased employment uncertainty, slower household income growth, rising refinancing costs and tighter consumer loan conditions, while mortgage rates remain restrictive and the room for housing demand to recover is limited. Housing ** has relatively more room for recovery. On the one hand, the shortage of existing homes** has lasted for many years, stimulating the construction of new homes to continue to rebound in recent years, and the number of months of existing home inventory available for sale has been declining after falling to less than five months in 2016, and the number of new home starts has risen from 1 million units in 2014 to an average of 1.53 million units per year from 2021 to 2023On the other hand, as mortgage rates fall, mortgages refinance at maturity and potential homebuyers become Xi higher interest rates than in the era of low interest rates, the "golden handcuff effect" may ease and existing homes** will improve.
The author is an economist at CMB International).