Publications

- February 1, 2019: Vol. 6, Number 2

Signs of the time: Is the U.S. housing market headed for a correction?

by Michael Canter, Janaki Rao and Monika Carlson

The median price of a U.S. single-family home has risen just over 40 percent since the last housing-market crash. While newspaper headlines may put readers on edge, an analysis of market conditions indicates a gradual slowdown — not a bursting bubble — in most regions. That’s largely because inventories remain tight and future demand looks healthy. Some market observers worry that recent declines in new and existing home sales are a possible warning of an impending crash. But a deep dive into the market’s fundamentals to better understand the risks shows the recent slump in home sales is due to lower housing affordability.

Housing affordability declined in 2018 because of higher home prices and rising mortgage rates. Could this be a sign of an impending secular decline in home prices?

Doubtful. Today’s reduced affordability looks more like a speed bump instead of a cliff. That’s because housing affordability is a function not only of mortgage payments but also of income. And income has been rising as the economy continues to chug along. Over time, this should help to moderate the negative effect of higher mortgage payments. Furthermore, the decline in housing affordability has not been massive. Homes are still more affordable than they were between 1999 and 2003, which was a healthy period in the housing market. And they are only moderately less affordable than between 2013 and 2016, which some observers consider the new normal.

That said, affordability could continue to decline as mortgage rates rise. If mortgage rates rise another 1.4 percent, for example, while home prices and income both hold steady, affordability will likely return to its 1999–2003 average.

If declining affordability is leading to lower home sales, the next question is whether lower home sales are leading to increased inventories. Such excess supply contributed to the last housing downturn.

Thankfully — and importantly — we are not seeing that today. Instead, supply remains tight. It’s true that the inventory of new unsold homes recently reached seven months, its highest level since 2011. But there is no drama in this figure. Even with the increase, new-home inventory remains at healthy levels and only slightly above its 50-year average of 6.2 months.

Why the difference between the last downturn and today? We saw a lot of speculative building leading up to the housing crisis, when builders were constructing homes without knowing future demand. Home developers are far more cautious now, having been burned so recently. They are building to visible demand instead.

With no correction in sight for U.S. housing, investors who back out of the mortgage market today may find themselves regretting the lost income.

 

This story was excerpted from an AllianceBernstein blog post written by company executives Michael Canter, Janaki Rao and Monika Carlson. Canter is director of U.S. multi-sector and securitized assets, Rao is portfolio manager and head of agency mortgage-backed securities research, and Carlson is product director of global fixed-income business development. Read their complete report at this link: https://bit.ly/2CKVVKx

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