Fan Yu
FAN YU is an expert in finance and economics and has contributed analyses on China’s economy since 2015.
US Housing Market Proving Resilient
FREDERIC J. BROWN/AFP VIA GETTY IMAGES
Homeowners have record home equity and good credit scores
u.s. housing market downturn will arrive, but it won’t be anything like 2008. After an unreasonably hot period for home prices following the COVID-19 pandemic, fueled by a new suburban migration wave and historically low interest rates, pundits are predicting a major housing crash similar to the one experienced during the Great Recession of 2008. Nationally, home prices rose 10.4 percent in 2020 and a record 18.8 percent in 2021, according to the industry benchmark S&P CoreLogic Case-Shiller National Home Price Index. That’s an extremely fast rise by any measure, and there are reasons to believe the music is about to stop. Mortgage rates nationwide have doubled since a year ago to more than 6 percent, inflation is hitting consumer pocketbooks, and the U.S. economy is staring at a recession. During the Great Recession, home prices on average fell 33 percent from peak to trough. Will housing prices decrease by that magnitude this time? Don’t bet on it. The last financial crisis was caused by the real estate market, and real estate prices predictably tanked. It was a product of widespread, insufficient underwriting of mortgage loans. Many subprime borrowers took out adjustable-rate mortgages that they then couldn’t pay. This caused mass foreclosures. And with foreclosed homes flooding the market, home prices fell, and mortgage borrowers became even more “underwater,” a phenomenon in which the mortgage owed on the house exceeds its market value. This time, the fundamentals couldn’t be more different. Today, mortgage quality in general is higher. The average borrower’s FICO score is around 750 today, compared to the high 600-range back in 2009. What this means is that borrowers today are more creditworthy and should
The average amount of mortgages owed by homeowners is just 43 percent of their home value, which is a recordlow ratio. be able to pay their loans, on average, at a higher rate than in the last recession. Today, homeowners also have record home equity. U.S. borrowers have collectively banked $11 trillion in home equity even while leaving 20 percent minimum equity in their homes, according to Black Knight, a real estate industry data provider. Record home equity, intuitively, also means that borrowers have low leverage in their homes. Today, homeowners owe mortgages worth only 43 percent of their home value, on average. Consumers are less likely to default on their mortgages today. There will likely be very few forced foreclosures at firesale prices, something that was prevalent during the 2008 crisis and caused a downward spiral in home prices. Aside from borrower strength, supply-demand dynamics are also propping up prices. An ongoing housing shortage in many markets is constricting supply. Freddie Mac, the federal mortgage agency, estimates that the United States is
short about 3 million homes. That’s the result of a decade of home underbuilding coming out of the 2008 crisis. And this imbalance is keeping home prices stubbornly high. Anecdotal evidence also supports these data. In talking to several experienced realtors in Northern New Jersey, they said that while the number of bids far above asking price has decreased, homes are still selling quickly and often above asking price. Nonetheless, some markets are, indeed, seeing price declines, especially in areas where prices have ascended and new home construction has skyrocketed (e.g., Austin, Texas). National homebuilding company Lennar co-CEO Richard Beckwitt rattled off a summation of “hot or not” of the U.S. housing market on the homebuilder’s quarterly earnings call in June. In Lennar’s view, the top markets currently are in the states of Florida, New Jersey, and Maryland; in the cities of Indianapolis, Chicago, Dallas, Houston, San Antonio, Phoenix, San Diego, and Charlotte, North Carolina; and in California’s Orange County and Inland Empire. These areas are still benefiting from tight supply and positive migration trends. Markets seeing moderate declines in home prices include Atlanta; Salt Lake City; Philadelphia; Charleston and Myrtle Beach, South Carolina; Nashville, Tennessee; Reno, Nevada; Colorado; Virginia; and the California Bay Area. As for markets where Lennar has seen significant sale price decreases? These include Los Angeles; Seattle; Raleigh, North Carolina; Austin, Texas; Minnesota; and Sacramento and the Central Valley in California. Real estate is a hyper-local asset class driven by local economies, migration patterns, and recent new building activity. Homeowners need to keep abreast of their local markets, but pundits predicting a 40 percent home price decline will be proven incorrect. I N S I G H T July 8–14, 2022 49
