With the Great Recession now eight years behind us, many investors have lately been taking stock of the housing market. More than a few respected institutional investors see great prospects for growth in the industry, and the fundamentals for U.S. housing market growth indeed look promising. The industry's outlook isn't without major challenges, however, which should be addressed. With that said, let's examine both the positive and negative aspects to growth in the housing industry and try to foresee where the industry is heading.
After many homeowners were badly burned by the 2006-2012 housing market collapse, not a few lower-end and middle-class homeowners were pushed out of the market altogether. Some were so badly scarred by the experience, they vowed never to return and are now consequently renters. Partly for this reason, U.S. household leverage has fallen to levels not seen since the late 1990s. Below is a chart that shows the household debt to GDP ratio for the U.S. going back over 10 years. This stunningly illustrates the difference between debt levels prior to the credit crisis and today.
While this development has the potential to be very good news for the U.S. economy, it also serves as a vivid reminder that middle America has never quite returned to the heady days of carefree spending and confidence in the future which accompanied the debt balloon in the previous decade.
Kevin Erdmann, who writes the Idiosyncratic Whisk blog, notes that during the housing collapse, home mortgage defaults, including jumbo loans, were spread evenly along the socioeconomic spectrum. Yet the regulatory response to the aftermath of the housing bubble was to restrict middle class and lower-income buyers from owning homes, even though upper-income homeowners defaulted just as much. The result, says Erdmann, is a "chimera economy" where only certain citizens have access to property. Consequently, U.S. housing production has never quite recovered to pre-2007 levels.
While home ownership remains a distant dream for many Americans, the overall economic impact of developments since 2007 is a fundamentally positive one. The Federal Reserve recently updated its calculation of U.S. households' debt service burdens as of Q2 2017. While total household liabilities climbed to a record $15.2 trillion, this represents less than 14% of total household assets.
Shown below is the long-term graph of household debt service payments as a percentage of disposable personal income. Household debt is defined as the combined debt of all people in a household and combines consumer debt and mortgage loans. Even taking into account that many lower- and middle-income Americans no longer own a home, the balance sheets of the average American have shown dramatic improvement since the crisis years.
This paves the way for the next phase of the long-term economic recovery in the U.S. and should eventually turn to Americans' good account at some point in the future. If the positive savings and debt reduction trends continue, eventually middle-income Americans will eventually find home ownership within reach once again.
Meanwhile, the multinational financial services firm Blackstone, which is the largest investor and owner in real estate, is reportedly bullish on the U.S. housing market. In a Yahoo Finance article entitled, "Blackstone: Simple math makes us bullish on housing," the firm explained why the firm was upping its bets on the industry.
According to Blackstone's head of real estate, Jon Gray, the U.S. housing market needs approximately 1.5 million to 1.6 million homes built in order to keep up with population growth. In the last 12 months, according to Gray, there were only 1.1 million homes built. He said the country has been under-building homes since the housing crisis. Gray said this is why U.S. home prices last month rose 6%.
A limitation of housing supply is one factor which makes the U.S. real estate outlook bullish. But so, too, are low mortgage rates. One of the key factors that have allowed real estate prices to advance since the bottom in 2012 in fact has been low mortgage rates.
With the 30-year fixed rate mortgage still near a long-term low, prospective homeowners have a major inducement to buy. Even if long-term mortgage rates begin to creep higher in the coming year, an initial rate rise can be equally bullish for housing prices since it tends to stimulate buying from prospective homeowners and investors who want to take advantage of low rates before they become burdensome.
Mortgage rates have remained stubbornly subdued for years, however, which has been a great boon to the housing recovery. Every major housing market slowdown has been a product of rising rates, particularly on a percentage change basis. As long as rates remain near the levels of the last 5-6 years, the recovery in the U.S. housing market should face no major obstruction in the year-ahead outlook.
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