Zhitong Finance APP learned that Morgan Stanley US housing strategist James Egan recently lowered his forecast for housing prices, saying that house prices will fall year-on-year in December 2023, but the expected decline is only 3%, which is far from the complete collapse.
It is understood that although mortgage interest rates in the US real estate market are soaring today, suppressing people's affordability, at the same time, unlike in 2008 and before the subprime mortgage bubble burst, there are very few people now forced to sell houses, and therefore very few inventory. From this point of view, the real estate market seems to have become a little strange.
To understand the direction of housing prices, the team examined four key factors: supply, demand, affordability, and credit availability. While the first two factors tend not to change rapidly, affordability and credit availability may change rapidly. This is exactly what we see now.
The result is that since the vast majority of homeowners are fixed-rate mortgages and the home net worth is still high, most people will not be affected by the upcoming shock. But this isolation comes at a price, which Egan calls the "locking effect."
Therefore, the real estate market may enter an unknown territory where indicators of housing activity will deteriorate rapidly even if housing prices remain firm. Below are seven charts showing the unusual aspects of the current housing market.
After the COVID-19 outbreak, housing prices soared
After the outbreak of the COVID-19 outbreak, the increase in housing prices has been very astonishing, even exceeding the peak in the early 21st century. As Egan noted, the gains in each of the past 16 months have been stronger than the record before the global financial crisis . Naturally, this raises the question: Is the rapid rise in housing prices sustainable?
Egan said: "If the year-on-year growth in the past 16 months is record compared to 2004 and 2005. Since the beginning of this year, the U.S. mortgage rates have greatly exceeded 300 basis points, and these factors combined will lead to a monthly mortgage payment of medium-priced house prices increasing by more than 50% year-on-year."
Figure 1
Mortgage rates have been hit
According to the Mortgage Bankers Association, the average interest rate for 30-year mortgages has risen from less than 3% in 2020 to nearly 7% now. This is the highest level since the early 21st century. But another key indicator has exceeded this level: the spread between mortgage rates and the benchmark rate measured in the yield on the US 10-year Treasury bonds.
Due to the uncertainty of the economic outlook brought by the Federal Reserve's interest rate hike , and the volatility of the bond market is significantly higher than before, many large investors are reluctant to buy mortgage-backed securities , which to a certain extent has led to an increase in the cost of buying a house with loans. At the same time, Feder is also gradually shrinking its balance sheet and staying away from the market.
Egan said: "In the past few years, many big buyers are unwilling to enter the market for various reasons. Coupled with the interest rate fluctuations we see, they may even be amplified by the interest rate fluctuations we see, which may lead to the spread of interest rate ."
Figure 2
Housing affordability is deteriorating rapidly
House price surge coupled with the rise in mortgage interest rates means that housing affordability is deteriorating at an unprecedented rate, especially compared with average income. The figure below shows the year-on-year changes in the proportion of monthly payments for medium-priced houses to average household income (blue), as well as the year-on-year changes in monthly payments (golden).
Egan said: "We have deteriorated seriously. The annual growth rate of the global financial crisis has never exceeded 30%, and we peaked in the 1920s. But why do we think house prices won't plummet now, why do we think this time different, because the question we have to ask is, who has deteriorated after the deterioration of affordability."
Figure 3
Refinancing activity has plummeted
As Egan pointed out, it is worth considering who has actually deteriorated.Most homeowners have fixed-rate mortgages, and most of them have refinancing in recent years to take advantage of the ultra-low interest rate, meaning that the affordability of existing homeowners is not a problem compared to potential homeowners. You can see the level of refinancing activity in the table below, which shows the Truly reancanceable Index of Morgan Stanley, which calculates how many percentages of qualified mortgages have at least 25 basis points of refinancing motivation. The index is at least the lowest level since 2005.
Egan explained: "When you consider the record mortgage issuance in 2020, we broke this fact in 2021, setting a new record for mortgage initiation, most of these homeowners are able to buy a home at an all-time lowest interest rate or refinance the mortgage, and their affordability has been locked in for 30 years. They don't see an aggravation of affordability. This deterioration is aimed at potential home buyers for first-time home purchases. That's the problem."
Figure 4
Lockdown effect
In an environment where mortgage rates rise and house prices are weak, those homeowners who are lucky enough to get lower interest rates don't have much reason to sell their homes, which to some extent creates a "lockdown" effect because existing homeowners refuse to put their homes on the market.
Egan said: "They were trapped in their current houses at lower rates. So what we think we've seen and what we expect to continue to see in the future is the inventory, the listing of existing houses for sale, we have data on units dating back to the early 1980s, and it has never been lower than earlier this year."
Figure 5
Home sales slowed sharply
As mortgage rates rise, many homeowners live in their own houses, which helps determine lower prices. But it is bad news for real estate agents, because new home sales will plummet. Due to the dual impact of declining purchasing power and insufficient supply of new homes, sales volume has declined faster than during the global financial crisis.
Egan said, "When a house is traded, it looks at the time of the last transaction of the house, so if we don't plan to sell these houses at a price below the purchase price, it will help support the house price activity. But on the other hand, this means that existing homeowners will not buy another house after selling their house, which we think will exacerbate the decline in sales."
Figure 6
But credit standards have tightened
Of course, when anyone sees home sales drop at the fastest rate since 2008, they may wonder if we are heading towards a repeat of the subprime mortgage bubble that triggered the financial crisis. For Egan, there are several factors that make this difference, including the structural shortage of housing in the United States, but perhaps the biggest consideration is credit availability.
Before 2008, it seemed that everyone could borrow a lot of money to mortgage multiple properties. But after the financial crisis, loan standards were tightened sharply, and problematic mortgage products such as Option ARMs almost disappeared from the market. This means that, in theory, people who own homes should be able to keep their homes even if economic growth slows down.
Egan said: "You just don't have those resets. You don't have a homeowner relying on credit availability environment to move forward, credit availability tightens. In the six months after the outbreak of COVID-19 in March 2020, we gave up a six-year easing policy. We are at the most tense level in nearly 20 years. If anything, it's because of the risk-weighted asset pressures of large banks, we think the road from now on may even be towards stricter lending standards."
Figure 7
Of course, this statement depends largely on the extent to which the impact of rate hike on the economy. If things get bad enough and many people lose their jobs, we may see a wave of troubled sellers that could release inventory and put downward pressure on the market.
Egan said: “Because homeowners lack reliance on refinancing capabilities, we don’t think this will force them to default or foreclosure.But it also means that we believe the risk of default and foreclosure has increased dramatically, and if we consider what will cause house prices to fall, it is those struggling transactions, those forced sellers. ”
