U.S. Housing; 2006-10 redux?

We've seen much consternation in the media - and particularly on social media - about the state of the US housing market. So how bad is the market outlook? And, importantly for all homeowners and potential buyers, are we likely to see a repeat of the house price declines the market saw 15 years ago?

Let's start with the concerning data. Mortgage rates have risen above 6%, making it much harder for prospective buyers to secure financing for the home of their dreams. Homebuyer affordability is now at the lowest level since 2006. This sounds ominous.

Rising rates and declining affordability have, understandably, put the brakes on the housing market. Sales volumes - not price - have declined, and especially for new home sales.

This leads us to the bear arguments "killer" chart. The months supply (inventory/sales pace) has deteriorated, and now stands at close to 11 months for new homes. This implies the average new home takes 11 months to sell, which is a level not seen since 2008. This sounds very ominous.

But not so fast. There's two parts to the months supply calculations: inventory levels (number of houses) and the sales pace. The sales pace has slowed. What about inventory?

Here the situation is more nuanced. Existing home inventory isn't an issue. There are 1.31mn existing homes on the market in the US right now; this is well below normal levels (see the yellow line below).

For new homes, the inventory situation looks more concerning. There are 466,000 new homes in inventory, which is the highest level since 2006.

But this new home inventory is mainly still homes under construction. For context, most large builders build to order, only starting a home once they've received a 10% deposit. Construction times have been delayed because of supply chain issues, so the number of homes under construction has doubled. This growth in homes under construction signals a healthy housing market, not one full of speculative inventory about to flood the market.

If we look at true supply of new homes (built but not sold), it is only 43,000 homes, which is less than a quarter of the 199,000 supply of new build homes on the market in 2008.

These 43,000 newly built homes for sale equates to 2.3 months of supply, not the 10.9 initial figure quoted above that most pessimists focus on. 2.3 months of supply is low relative to history (i.e. even with the slow sales pace today), as we can see in the white line in the first panel below. The market cracked in 2006/7/8 when we quickly grew to 6 months of supply of newly built homes, and then prices started to fall. That's not the case today.

So how much true supply of move in ready homes is there overall? Not much. If we add the new home supply of 43k to the existing home supply of 1.31mn we reach 1.35mn. On market supply has typically been around 2.0mn for the past 20 years. We only had material downward price pressure when supply on the market reached 3.0mn houses in early 2006.

This conclusion of "it's not a problem" may appear surprising, especially after all the doomsday headlines and rapidly rising mortgage rates. So why has housing been resilient?

The first reason is the structure of the mortgage market. Most people have fixed rate mortgages - less than 10% are adjustable rate mortgages - so the US market is different to that in the UK, Australia and New Zealand that have a much higher percentage of floating rate mortgages. Many people have locked in rates at very low levels, so mortgage stress remains very low.

The second reason is the consumer is flush with cash. The Covid stimulus payments and lockdowns meant many households saved significant cash during 2020 & 2021, such that cash savings are now $3tn (3x) higher than they were before the pandemic. Most US households are doing very well financially, which we can also see from persistently high inflation figures. While this situation is an issue for the Fed trying to rein in inflation, its a source of strength for the housing market.

What does this all mean from an investment perspective?

First, don't panic about your home's value. It is highly likely to be fine.

Second, housing-related stocks have sold off materially on this panic. They're priced at half their market-relative level, and we are actively investing in this space. I cannot share any specific information or ideas here given my regulatory responsibilities, but if you're interested please get in touch.