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The US housing market has experienced a significant and sustained boom following the COVID-19 outbreak. Housing prices have surged by over 40% within just two years. In 2023, the Case-Shiller House Price Index is approaching its historical high again, while mortgage rates hit a 20-year high in August. As a result, many Americans are struggling to afford a house.

How did the US housing market end up in this predicament? In this article, we will pore over the current US housing market.

● Why Analyzing the Real Estate Market is Important

● Real Estate Market Classification

● The Most Widely Watched Housing Indicators by Investors

● What has happened in the US housing market in recent years?

● How does the financial market react to housing data?

A home serves not only as a residence but also as an economic indicator for investments.

Real estate is a vital component of the US economy and is sensitive to changes in interest rates, which may influence consumer spending on large-ticket items as well as employment. Real estate activities contribute significantly to a country's GDP, with the average comprehensive contribution of US housing to GDP ranging from 15-18%, according to statistics from the NAHB. Therefore, during economic recessions, the real estate industry is often one of the first to weaken, and it can be one of the first industries to rebound during economic recovery.

The US real estate market is highly financialized, with many real estate mortgages turned into financial assets through securitization. This has led MBS (Mortgage-Backed Securities) to become the second-largest fixed-income market after government bonds. As a significant element of finance, risks associated with the US real estate market can have potential impacts worldwide. We will delve further into this topic later in the article.

Real estate is defined as land and any permanent buildings, which are primarily classified into five categories:

1. Residential real estate: Any property used for residential purposes. Examples include single-family homes, condominiums, duplexes, townhouses, and multi-unit dwellings.

2. Commercial real estate: Any property specifically used for commercial purposes, such as gas stations, hospitals, hotels, office buildings, parking facilities, restaurants, and shopping centers.

3. Industrial real estate: Any property used for manufacturing, production, distribution, storage, and research and development.

4. Land: This includes undeveloped properties, vacant land, and agricultural land, such as farms, orchards, ranches, and timberland.

5. Special purpose: Properties used for public use, such as cemeteries, government buildings, libraries, parks, places of worship, and schools.

In this article, we will mainly focus on the US residential real estate market.

In the US, the housing market can be categorized into two types: the new housing market and the existing housing market.

New Housing Market: In terms of GDP, new residential sales have a more direct and apparent contribution than existing homes. This is because these sales activities represent an increase in demand and production for the economy.

Existing Housing Market: Unlike new homes, existing homes are those that were owned and occupied before entering the market. Due to the early urbanization process in the United States, there is a higher volume of existing housing than new housing, making it an essential part of the US real estate market.

Housing can also be classified by structure: single-family homes and multi-family homes.

Single-Family Homes: These are independent housing units designed and built for one family, such as villas. Single-family homes offer more privacy and space, but are also more expensive.

Multi-Family Homes: These residences contain multiple dwelling units, such as apartments. Multi-family homes are generally cheaper, come with public facilities, and are easy to rent out.

1. New Home Sales:

New home sales are the most direct indicator when analyzing the US housing market. The U.S. Census Bureau releases monthly economic indicators for new home sales at the end of each month.

It's essential to note that statistics are gathered when clients sign a sales contract or pay a deposit. At this time, the house can be constructed at any stage, and full payment is not necessarily required.

Since consumer income is highly sensitive to new home sales, which are included in economic consumption growth, it has become an excellent indicator of economic recession or recovery. For instance, when new home sales decline for several consecutive months, it usually signals an economic downturn.

New Home Sales vs. Existing Home Sales

New home purchases represent only about 10% of the overall housing market. However, new home sales are still considered a more timely indicator of the housing market than existing homes because they are counted upon signing the contract, while existing homes' data is included only after contracts are completed, representing purchasing activities with some lag.

Inventory-to-Sales Ratio

The inventory-to-sales ratio, which indicates the relationship between the size of the inventory for sale and the number of homes on the market, is released monthly by the U.S. Census Bureau. Also known as the months' supply of homes or housing inventory turnover ratio, it helps analysts assess the state of the housing market.

The indicator is divided into the inventory-to-sales ratio for new homes and the inventory-to-sales ratio for existing homes. The higher the data, the higher the inventory. For example, for new homes, the new home inventory-to-sales ratio indicates "how long will the current unsold inventory last at the current sales rate if no additional new homes are built?"

As depicted in the image above, there has been a substantial disparity between new home and existing home inventory-to-sales ratios since 2023. This divergence is attributed to imbalances of supply and demand in the two markets caused by mortgage interest rates, with the existing home market facing a severe shortage of available properties.

2. Case-Shiller US National Home Price Index

The S&P CoreLogic Case-Shiller U.S. National Home Price Index tracks changes in the value of residential properties in the US, published by S&P at 9 am Eastern Time on the last Tuesday of each month. It's important to note that the S&P CoreLogic Case-Shiller U.S. National Home Price Index is calculated using a three-month moving average, so there is a lag of two months in the index, but it remains the most widely watched housing indicator in the capital market.

The importance of the S&P CoreLogic Case-Shiller U.S. National Home Price Index for the economy can be summarized as follows:

● The supply and demand of the real estate market determine house prices, which will affect new home sales.

● House prices also affect housing rents, and rent is an important component of the US CPI. In other words, house prices have a significant impact on US inflation. Therefore, the S&P CoreLogic Case-Shiller U.S. National Home Price Index is also one of the indicators that the Federal Reserve is concerned about.

● The S&P CoreLogic Case-Shiller U.S. National Home Price Index is also used as the underlying pricing mechanism for Chicago Mercantile Exchange (CME) real estate futures and options.

Note: Indexes are unmanaged and cannot be directly invested into. Past performance is no indication of future results. Investing involves risk and the potential to lose principal.

3. Mortgage Interest Rates

When analyzing the real estate market, it's important to consider the mortgage environment because mortgages are a primary source of funding for housing, affecting the overall housing supply and demand. Mortgage data is released weekly by Freddie Mac and has some guidance significance for monthly new home sales.

As most US homeowners hold 30-year fixed-rate mortgages, this indicator is frequently used to observe the mortgage environment. As of August 2023, 30-year fixed-rate mortgages have risen to the highest levels since December 2000, causing mortgage applications to fall to their lowest levels in 28 years.

Note: Past performance is no indication of future results. Investing involves risk and the potential to lose principal.

1. Quantitative easing -> extremely low mortgage interest rates -> buying houses -> rising house prices

The US housing market had been steady with moderate price increases until the COVID-19 pandemic hit.

Loose monetary policy and government subsidies led to an enormous money supply, driving capital into the real estate market. Extremely low mortgage interest rates and increased demand for working from home have significantly increased residents' income and purchasing power, but the number of housing units in the US has hardly changed.

However, during the period from 2019 to 2021, the number of housing units in the US only increased by 1.7%, causing a significant supply and demand imbalance. As a result, house prices rose sharply, reaching a peak of a 19.3% increase in July 2021.

Bloomberg reported the median American home grew in value by US$52,667 in just one year from December 2020 to December 2021, which exceeded the $50,000 earned by the median American worker during that time.

Residents who hadn't owned a house might feel pressured by sustained inflation levels and rising rents, leading them to believe that house prices would continue to rise in the future. With low mortgage interest rates, buying a house became more attractive than renting, and many people concluded that the best time to purchase a house came. Consumer expectations can further drive house prices.

2. Interest rate hike → increase in mortgage rates → unable to afford a house but unwilling to sell → shortage of inventory

In 2022, the Federal Reserve began withdrawing the liquidity it had injected into the economy during the COVID-19 pandemic. As interest rates rose, mortgage rates went up, while government aid and subsidies to residents were gradually phased out, driving up the costs of buying a home. The sales of both new and existing homes have declined.

In June 2022, for the first time since 2008, the average 30-year mortgage rate exceeded 6%, and as of late August 2023, the rate was up to 7.36%, the highest level in over 20 years.

The sudden increase in mortgage rates has been challenging for sellers and buyers alike, and there are two notable effects on the housing market.

On the one hand, rising interest rates are limiting many homebuyers' purchasing abilities, leading to weaker sales of single-family homes, which makes it challenging to digest the inventory created by earlier high construction activity.

On the other hand, existing homeowners are reluctant to buy or sell. Many homeowners purchased their homes at extremely low mortgage rates during the COVID-19 pandemic. With interest rates now skyrocketing, these homeowners are unwilling to sell their homes with low-interest rate mortgages because they would face the dilemma of purchasing another home under high-interest rates if they sell. This unwillingness to sell homes that could otherwise be sold has resulted in an inventory shortage and low vacancy rate in the existing home market.

3. Housing prices are rising again

Despite rising mortgage rates and declining sales, housing prices continue to rise due to a shortage of available housing units.

Between 2012 and 2022, an average of 1.4 million households were formed annually in the United States, while only 1.2 million new homes were built each year on average. This scarcity led to intense competition among potential buyers, who often had little bargaining power in negotiations with sellers and may have ended up paying higher prices for homes. The increased competition among buyers thus further helped drive up the surge in housing prices.

To address this issue, builders reduced the construction of single-family homes and turning to multi-unit dwellings as the rental market remained profitable. However, the gap between supply and demand continued to widen, resulting in historically high national rent levels in June 2022.

While housing data does not move the bond and stock markets as much as unemployment data, it can be useful in economic cycles.

For example, stronger-than-expected new home construction may boost profits for companies and trigger a stock price rise in the real estate sector. Conversely, lower-than-expected construction rates may push down related stock prices and increase bond prices.

Wanna learn more?

Check out the macro analysis in the "Advanced" section to learn more about the Real Estate Market. Update yourself with the latest data and market trends to make more informed investment decisions!