Thursday 22 April 2021

Points experts

Boom of the US real estate market: this is not only about interest rates

By Inès Belhajjam, Strategist, and Bastien Drut, Chief Thematic Macro Strategist at CPR AM

Over the past few months, figures related to the US real estate market have been particularly good. While it is clear that lower interest rates have stimulated this market, it is not the only explanatory factor since demographic factors are also supporting demand.

REMARKABLE STATISTICS FOR RESIDENTIAL REAL ESTATE

Building permits and housing starts have returned to their highest levels since 2006, ie for 15 years. The number of home sales has also returned at very high levels and real estate prices are rising very fast: for example, the median sales price for existing homes was up by 15.7% in February (the same type of evolution can be seen for the Case Shiller indices). At the same time, the stock of homes available for sale has literally collapsed to 1 million, the lowest level since this series by the National Association of Realtors (NAR), in 1982.

Construction spending for residential real estate has grown very rapidly over the past quarters (+21.1% year-on-year in February), which means that the sector contributes significantly to GDP growth. By the way, the dynamic is the opposite for non-residential real estate (-7.8% year-on-year in February), which is affected by the covid crisis, because of lower traffic in physical stores and of the stronger use of remote working.

LOWER LONG-TERM INTEREST CONSTITUTE A CLEAR SUPPORT FOR THE REAL ESTATE MARKET

Housing is one of the sectors most sensitive to changes in interest rates and the upturn in the real estate market is largely due to the Fed’s very accommodative monetary policy since the onset of the covid crisis:

  • The fed funds range target has been lowered to 0/0.25%
  • The spectacular asset purchases at the height of the crisis have been followed by monthly purchases of $80bn of Treasury securities and $40bn of MBS.

The combination of these different actions (and the fact that the Fed currently purchases more than half of the MBS coming to the market should not be underestimated) has led to a sharp decline in mortgage rates: the 30-year fixed mortgage rate reached an all-time low of 2.65% at the beginning of 2021. While these rates have certainly risen over the past few months, they remain significantly below 30-year Treasury bond yields and below their levels of the past decade for example.

With the increased use of remote working caused by the pandemic, a very strong increase in demand for second homes was noted by several home brokers, most likely from affluent households (whose wealth has greatly risen the covid crisis).

Another factor that supported the US real estate market despite the very severe recession of 2020 and the sharp rise in unemployment was the "mortgage forbearance". First decided at the CARES Act passed in March 2020: households experiencing difficulties were able to postpone their monthly mortgage payments (provided their loans had been granted by government agencies such as Fannie Mae or Freddie Mac). This decision allowed households affected by the crisis not to have to sell their homes against their will. Some Fed research has confirmed that this had a positive impact on prices...

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