American housing market resilient

Article about American housing market resilient

May 19, 2020

By Robert J. Teuwissen on May 19, 2020

House index

This week in the United States several figures are reported on the state of the housing market. Today, for example, the number of building permits and houses under construction. Together with the labour market, the housing market is the most important pillar of the U.S. economy. The state of the housing market can, therefore, provide a good insight into the state of this economy. Yesterday, the NAHB (National Association of Home Builders) published the monthly Housing Market Index, a reflection of sentiment in the construction industry. In the month of May, the index rose to 37. In April it was still 30. That was better than analysts had expected. Also noteworthy was the increase in the average price for a house of one percent compared to the same period last year.

Striking calmness

This relative calm in the housing market is striking. In the month of April alone, twice as many Americans lost their jobs as during the entire credit crisis. One-third of the tenants defaulted on their rent. Retail sales collapsed completely. The economy contracted and went through an extraordinarily tough second quarter. A sharp collapse of the housing market would then be in line with expectations. Nothing could be further from the truth. For example, the number of applications for new mortgages has risen sharply since the start of the crisis. Google registered more searches for a "new house" than before the outbreak of the pandemic.

Cares Act

Why is the housing market holding up so well in all this economic violence? Part of the explanation is temporary. For example, many homeowners, despite their inferior financial situation, are not immediately under pressure to sell, as was the case during the previous crisis. Far fewer owners are "underwater" because they had to contribute more equity as a result of the previous crisis in order to qualify for a mortgage at all. The quality of outstanding mortgages is also higher as a result of the stricter regulations. And should the water still rise to the lips, this time there is the Coronavirus Aid, Relief and Economic Security (Cares) Act. This law, passed in March, gives homeowners up to six months deferred payment, with the option for another six months. This grace period is extremely effective in flattening the curve. A wave of house evictions like during the previous crisis is not (yet) in evidence this time. By the way, the postponement does not mean adjustment. At a later stage, homeowners will still have to pay their debts.

Historically low-interest rates

The historically low-interest rate is also an important pillar of the housing market. For example, the interest rate on 3.3-year mortgages is only 3.3 per cent and, for the first time in history, threatens to fall below three per cent. Especially when the interest rate on 10-year government bonds remains at their current level of 0.7 percent. On the other hand, however, mortgages are much more difficult to obtain. The Credit Availability Index is at its lowest level since 2014.

Shortage of available houses

Another reason for the striking resilience of the housing market is the shortage of available houses. The current housing supply simply does not match the demographic structure of the population. For example, a large group of no less than 72 million millennials (ranging from 24 to 39 years of age) are approaching the point at which they would like to purchase their own homes. However, the United States is massively underdeveloped. A situation similar to the years after the Second World War seems to have arisen. In any case, it will not have a negative impact on the house price. In California, there were already more viewers for a house than a year ago.

More figures

Developments that may help the housing market in the world's largest economy to hold up reasonably well this time. Of course, everything depends on a possible return of the virus. And the possible thump that the economy may then have to endure. But for now, the US housing market has held up reasonably well and the dip - which wasn't too deep - seems to be behind us again. For instance, the S&P Homebuilders Index (XHB) has risen 57 percent since the bottom of March. Today the number of houses under construction and the number of building permits issued are published. A sharp drop is expected by analysts. If we can believe yesterday's report of the NAHB, that might have been the bottom.

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