US housing supply deficit pushed housing prices to record highs at a rapid pace, affecting affordability especially of first-time home buyers. This in turn slowed down sales activity with new home sales down to a year low in May. However, demand for housing remains strong and a crash is not likely. Despite some risks, prices should settle at levels higher than during the pre-pandemic period.
Housing has been a key source of strength during the post-pandemic recovery phase. As early as May 2020, we highlighted the jump in mortgage applications as an initial sign of a V-shaped recovery in the United States (US). Soaring demand subsequently prompted a substantial supply response so much so that residential investment made nearly as large a contribution to GDP growth in Q4 2020 as household consumption!
Yet, despite the notable acceleration in housing starts, the supply deficit worsened. Consequently, US house prices are not only at record highs, but they have also been rising at a near record pace (Figure 1). In May 2021, the median price of an existing single family home was 24.4% higher than a year ago. Compare that with previous peaks of 16.9% YoY in October 2005 and 17.2% YoY in 1979!
Figure 1: US Housing Faces a Growing Affordability Problem
What’s in Store?
We believe that deteriorating affordability will slow – but not doom – the US housing boom. Affordability has undeniably deteriorated over the past year. Price appreciation appears most intense at the lower end of the market, as evidenced by the record high ratio of the median to the average house price. This is a particular disadvantage for first time home buyers, an increasing number of whom are being priced out and forced to delay purchases.
We have seen a notable slowdown in sales activity in the past couple of months, with new home sales down to a year low in May. The message seems to be clear: the recent pace of price appreciation is not sustainable. Indeed, some price moderation could be on the horizon, especially in the new house segment, as input costs normalize somewhat from recent spikes. For instance, although lumber prices more than doubled from the start of the year to mid-May, they have since retreated by about 45% (Figure 2).
Figure 2: Lumber Plunges From Record Highs But Still Pricey
A Breather, Not a Crash
This, however, does not imply a crash. Demand for housing remains impressively strong. According to the National Association of Realtors (NAR), existing homes stayed on the market for a mere 17 days in April and May (record lows and down from 26 days in May 2020) and nine out of ten homes sell in under 30 days. The COVID-19 crisis and ensuing work from home arrangements appear to have had a two-fold positive impact on housing demand: an enhanced preference for home ownership and surging demand for vacation homes.
The NAR recently reported that during the first four months of 2021, vacation homes accounted for 6.7% of all existing home sales, up from 5.5% in 2020 and 5.0% in 2019. These trends, in conjunction with the housing construction deficit of the post- global financial crisis (GFC) period, will likely support housing activity in the coming quarters. Moreover, the credit quality of current buyers is strong, offering a far more reassuring picture than in the years preceding the GFC (Figure 3).
Figure 3: Borrowers With High Credit Scores Drive Mortgage Originations
In a Nutshell
We suspect we are past the explosive growth phase of the post-pandemic housing cycle and are shifting into a slower but still robust period. In our view, these supply constraints and high prices will not kill demand as much as impose a degree of self-regulating discipline on the market. Demand would just get pushed out into the future to allow supply to catch up. At the same time, solid pent-up demand for housing should put a floor under prices, preventing outright reversals.
Admittedly, risks to prices may increase down the line when the US Fed begins to normalize interest rates and mortgage rates rise as a result. Albeit this possible decline from their peak, housing prices should settle at levels higher than during the pre-pandemic period.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without State Street Global Advisors’ express written consent.
The views expressed in this material are the views of the Global Macro and Policy Research team through 07 July 2021 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. All information is from State Street Global Advisors unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
Past performance is not a guarantee of future results. Investing involves risk including the risk of loss of principal.
The trademarks and service marks referenced herein are the property of their respective owners. Third party data providers make no warranties or representations of any kind relating to the accuracy, completeness or timeliness of the data and have no liability for damages of any kind relating to the use of such data.
For EMEA Distribution: The information contained in this communication is not a research recommendation or ‘investment research’ and is classified as a ‘Marketing Communication’ in accordance with the Markets in Financial Instruments Directive (2014/65/EU) or applicable Swiss regulation. This means that this marketing communication (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research (b) is not subject to any prohibition on dealing ahead of the dissemination of investment research.
This information is for informational purposes only, not to be construed as investment advice or a recommendation or offer to buy or sell any security. Investors should always obtain and read an up-to-date investment services description or prospectus before deciding whether to appoint an investment manager or to invest in a fund. Any views expressed herein are those of the author(s), are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients. There are no guarantees regarding the achievement of investment objectives, target returns, portfolio construction, allocations or measurements such as alpha, tracking error, stock weightings and other information ratios. The views and strategies described may not be suitable for all investors. SSGA does not provide tax or legal advice. Prospective investors should consult with a tax or legal advisor before making any investment decision. Investing entails risks and there can be no assurance that SSGA will achieve profits or avoid incurring losses.
Performance quoted represents past performance, which is no guarantee of future results. Investment return and principal value will fluctuate, so you may have a gain or loss when shares are sold. Current performance may be higher or lower than that quoted.
Images of NYSE Group, Inc. are used with permission of NYSE Group, Inc. Neither NYSE Group, Inc. nor its affiliated companies sponsor, approve of or endorse the contents of this program. Neither NYSE Group, Inc. nor its affiliated companies recommend or make any representation as to possible benefits from any securities or investments.