Chart Of The Week - U.S. Housing Better And Worse

Sep. 28, 2022 9:51 PM ET
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Summary

  • Rising interest rates reduce house purchasing power, regardless of mortgage stress.
  • Debt to income levels have come down considerably reducing risk in different areas of the market.
  • US housing market valuations have surpassed the extremes of the subprime bubble.
Full length of saleswoman greeting female customers while standing outside house

The Good Brigade

Housing Market Risk: The US housing market is both better and worse than pre-financial crisis. On the one hand, debt to income ratios have come down a lot — meaning less leverage and therefore less likelihood of negative equity, defaults, credit stress, and systemic risk to the banking system.

Borrowers also have a greater likelihood of having fixed their interest rate, with much less exposure to variable rates this time around.

However — house purchasing power goes down as rates go up. Regardless of mortgage stress, this mathematical fact naturally acts as a sinking lid on house prices.

This is particularly interesting when you realize US housing market valuations have surpassed the extremes of the subprime bubble. So maybe we see less stress given less leverage, but we still likely see a material correction as rate shock meets stretched valuations. At the very least this will act as a clear headwind to growth/confidence.

US Housing market valuation chart

Topdown Charts

Key point: US housing market is less leveraged, but more expensive vs. pre-08.

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Topdown Charts is an independent research firm covering global asset allocation and economics - bringing a chart-driven, top-down approach to investors.  -->> Check out our new entry-level service: https://topdowncharts.substack.com/--We take a top-down, global multi-asset perspective to deliver:Actionable investment ideasRisk management inputMeaningful macro insightsCharts to use in your own work--Our clients include Pension companies, RIAs, Hedge Funds, family offices, insurance firms, and wealth managers and Investment Consultants.--Sign up for exclusive insights:  https://topdowncharts.substack.com/===================================================

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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