Housing has so far weathered the Corona pandemic well. Indeed, the US housing market index reached a new all-time high in October (see Chart 1). In our view, the surge in housing activity is partly transitory and likely to abate in coming months. However, we believe housing remains on a positive growth track and is not entering a bubble.
We were already positive on housing before the Corona Pandemic (see also ZAIS Insight "Housing on track for moderate gains", April 20192). The lockdown in March and April interrupted the up-move in housing but activity and prices have rebounded strongly since then (see Chart 2).
In our view, the housing surge has four drivers:
Housing activity dropped between 20% and 50% in the two months to April during the lockdown (see Table above). Yet by September housing sales and starts stood well above the pre-lockdown levels except for multiple-unit housing starts.
On a cumulative basis, however, the surge in activity was not enough to offset the prior declines except for new home sales, pointing to still pent-up demand. We expect these gaps will close in coming months, reducing the pressure from pent-up demand. Indeed, new single-family home sales already leveled off in August (see Chart 2).
The other transitory factor is the boost to disposable incomes from government transfer payments. Disposable personal incomes surged by 13% between February and April, but the transfer boost has faded since then and disposable personal incomes have gradually realigned with the trend before the Corona pandemic.5
Nevertheless, households had 7.8% more income at their disposal in the first nine months of the year than they did a year earlier. We believe some of that extra money was spent on housing given people spending more time at home and fewer other spending opportunities.
The political deadlock in Washington before the election has prevented a new stimulus package. We think this will change after the election but doubt that the next round of transfer payments will have the same effect on disposable personal incomes as in 2020.
A more powerful and lasting factor is, in our view, the effect of lower mortgage rates, as housing is traditionally one of the most interest-rate sensitive sectors of the economy.
Mortgage rates were already on the decline before the start of the Corona pandemic: the 30-year mortgage rate dropped from nearly 5% in November 2018 to a historical low around 2.8% now (see Chart 3. Based on our calculations that means a median family could afford to spend about 30% more on a home than two years ago.6
Importantly, households are not excessively leveraged which, in combination with lower mortgage rates, has significantly reduced mortgage-debt service payments (see Chart 4). Households have also increased their savings rate, giving them more capacity to take on loans and make down-payments.
Furthermore, we believe banks will remain supportive of the mortgage intermediation process. Banks have tightened lending standards,9 but we think are in better shape than during the financial crisis (see also ZAIS Insight "Banks are in better shape to weather the Corona fallout," August 202010).
The combination of very low mortgage rates with good household and banking balance sheet health is a positive driver for housing. We believe Fed interest rate policy will support this favorable environment for several years to come.
The other more lasting factor, in our view, is the impact of the Corona pandemic on housing preferences. As described below, the evidence so far points to a shift from city-center living to suburban single-family homes.
Sales of new single-family homes, which are typically located in suburban areas, have surged, while multiple-unit housing starts have failed to recover in contrast to single- unit housing starts (see again Table above).
The trend change is also reflected in house prices. Nationwide house prices rose 5.0% annualized between February and August yet house prices in New York City, for example, inched 0.1% lower.11
We are mindful of a temporary overreaction but believe that housing preferences are changing due to the Corona pandemic and that this change will last a few years. Spending more time at home, working from home and the desire for more space and distance are likely to be important criteria for homebuyers in coming years.
Despite the current buoyancy, developments in the housing market show no resemblance to the excesses of the housing bubble in the mid-2000s.
Note: Each point forming the blue line above represents a sequential quarterly observation beginning with Q1 1980 at the left-most point and ending with Q3 2020 at the right-most point.
We have entered uncharted territory with the Corona pandemic and it would be foolish to think that housing can thrive no matter what happens in the economy otherwise. Two risk factors stand out in our view.
As always, we are available to discuss our views with you. Please contact your Client Relations representative at +1 732 978 9722 or firstname.lastname@example.org
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