As most countries are seeing falling prices, The Economist looks at what is different in the US market.
The dream of homeownership in America appears to be slipping away for many as high property prices, expensive mortgages, and limited options make housing increasingly unaffordable.
Despite these challenges, the American housing market has defied expectations by remaining robust and continuing to show growth. This article delves into the factors contributing to the resilience of house prices, providing insights for potential investors as they navigate the current market.
4 Reasons
- Mortgage Rates and House Prices:
Traditionally, housing markets have been sensitive to changes in interest rates. However, in the United States, the relationship between mortgage rates and house prices has been somewhat unconventional. Over the past two years, as the Federal Reserve increased interest rates, mortgage rates soared from less than 3% to over 7%. Despite this significant increase, house prices did not decline. After a brief dip, they rebounded to reach record highs. In the second quarter of this year, house prices rose at an annualized pace of 15%. - Decline in Supply and Demand:
One of the key reasons for the resilience of house prices is the decline in both supply and demand in the market. Demands for houses decreased as mortgage rates rose, but the supply of properties also decreased almost in tandem. Homebuyers in the US typically obtain fixed-rate mortgages for 30 years. As previous buyers secured mortgages with lower interest rates, they are less willing to sell their homes to upgrade to new ones. Redfin estimates that around 82% of homeowners have mortgage rates below 5%, creating a situation of “suspended animation” in the housing market. - Investment in Current Homes:
With limited options to trade up to new properties, locked-in homeowners have instead chosen to invest in their current homes. This trend has been further reinforced by the rise of remote working, leading people to add office spaces and make other renovations. Expenditure on remodeling reached nearly $570 billion in 2022, accounting for approximately 2% of GDP and representing a 40% increase from 2019. This trend has helped buoy the economy, with homeowners opting to spend on remodeling, construction, and furniture, offsetting the decline in transactions. - Preferences for New-Build Homes:
Many potential buyers have turned their attention to new-build homes due to their availability and the lack of competition from existing homeowners. New-build properties accounted for about one-third of active listings this year, compared to an average of 13% over the previous two decades. Homebuilders have also offered incentives to buyers, including buying down mortgage rates by paying a one-time fee upfront. This has provided a welcome relief for buyers in the current environment and led to an increase in both purchases and construction.
Conclusion
The American housing market has defied expectations as house prices continue to rise despite soaring mortgage rates. The decline in both supply and demand, coupled with homeowners’ investments in their current properties and a preference for new-build homes, has contributed to this resilience.
As the market faces potential challenges from increasing mortgage rates, lenders may resort to riskier deals, while homeowners with little equity may be at risk of defaulting. Furthermore, a strong housing market could contribute to an overheating economy and complicate the inflation outlook.
Though uncertainties lie ahead, understanding the dynamics of the American housing market can guide potential investors in their decision-making processes.