The behaviour of the housing sector typically mirrors the economic cycle. Indeed, the housing market crisis in the US stood at the epicentre of the 2008 financial crisis, which was characterised by a sharp drop in home prices, building permits and construction spending as the housing bubble popped. In contrast, despite that the COVID-19 led economic downturn has led to a forecasted 2020 GDP contraction and a surge in unemployment, the US housing market so far stands resilient during this recession, supported by a lower interest rate environment and a tight market supply of homes for sale.
Over the past months, the US housing market has recorded a solid recovery from March lows. Home ownership rate has increased by 2.6 per cent during the second quarter to 67.9 per cent. Rather than plunging, the US housing price index recorded a 6.5 per cent year on year growth rate in July. New housing starts, which act as a key leading economic indicator for expected demand has managed to beat expectations twice over the past three months, and only decreased slightly on a monthly basis in August after surging by 23 per cent in July. Similarly, building permits hit a six-month high in July to a seasonally adjusted annual rate of 1.495 million.
Demand for the real estate market is dependent on the level of house prices relative to average income, and population demographics such as family formation. Most importantly, however, home buyers typically finance home purchase with a mortgage, which makes the sector interest rate sensitive. On this front, accommodative monetary policy since the start of the pandemic has lowered mortgage rates, which in turn improved housing affordability. On average, a 30-year mortgage rate fell approximately by one per cent to the three per cent level by September. Having said that, mortgage applications in the US have recently ticked higher following an 8.8 per cent rise in applications to refinance a home loan and a 3.4 per cent increase in homebuyer mortgage applications.
Supply factors also come into play, with house prices fluctuations also dependent on the level of inventory levels of unsold homes. As the inventory level increases, property prices are expected to decline and vice versa. The US housing market, which is characterised by a historically constrained supply, recorded a year-on-year decline of 18.6 per cent in inventory of homes for sale as of August. This also contributed to the rise in housing price index.
A textbook economic cycle example also describes how governments and central banks are expected to step in to stimulate an economic recovery. The covid-19 led recession was a primary example on this front. The level of policy action to re-ignite economies post pandemic lockdowns, was both unprecedented in scale and speed. In the US, the housing market was boosted through forbearance schemes, which allow mortgage payers to request assistance in order to manage their payments and stimulus cheque payments, which helped to limit the impact of the covid-19 pandemic on household income.
Going forward, despite that the strong demand and tight supply market buoys well for the housing market outlook, a sustained recovery remains closely dependent on a strengthening macroeconomic backdrop.
Disclaimer: This article was written by Rachel Meilak, CFA equity analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd which is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018. For more information visit https://cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.