U.S. Housing Outlook: No Bust After the Boom
Single-family house prices have been rising at record rates, raising the question of whether they have become disconnected with fundamentals. In October 2021, U.S. home price appreciation reached an annualized pace of 20%,Footnote1 almost double the rate in 2012 when housing was rebounding off its lows of the global financial crisis (GFC).
Yet, in our view, this cycle is different. We believe the single-family housing market is on much stronger footing today versus the pre-GFC period. Every entity involved in housing, including homebuilders, lenders, government-sponsored entities (GSE), investors, and borrowers, was in some way scarred by the financial crisis and has tended to behave more conservatively ever since. As a result, U.S. housing should remain supported over the long term by two pillars: a secular shortage of housing units and resilient, delevered borrowers.
In our base case outlook, we expect home price appreciation to slow in line with long-term trends and inventories to gradually recover off record lows. Affordability is likely no longer the tailwind it was in the summer of 2020 when mortgage rates plunged, but remains in line with long-term trends. If rates continue to rise significantly, affordability will likely pressure housing, but we expect the fundamental stability of the market limits the risk of a major correction. Further, we think that the emergence of institutional owners in the single-family rental market may be another source of price support in certain areas.
The secular shortage of houses remains unaddressed
Supply scarcity supports the current boom in U.S. home prices, a marked difference from the speculative bubble fueled by extremely loose underwriting that preceded the GFC (see Figure 1). Housing construction has lagged demand for nearly 10 years; the pre-GFC glut was absorbed long ago.
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A confluence of circumstances underpin this scarcity. Lending standards have tightened, and banks have higher capital requirements for residential construction loans. Millennials are reaching prime home-buying age, and many older adults are staying in their homes longer. As a result, while homebuilders are close to building enough homes to satisfy the housing needs of current U.S. population growth, there remains a significant shortage of houses from the long period of underbuilding. Estimates of this secular shortage range from two to five million houses, while the current annual construction rate is just 1.6 million houses.Footnote2 We do not believe this imbalance will be resolved near term. Ramping up construction has proven exceedingly difficult: Building costs have ballooned amid supply chain bottlenecks and tight labor pools, and local zoning regulations often make developable land scarce. As one illustration, the cost of building materials increased by 7% (cumulatively) from 2015 to 2019, and then jumped 26% from 2019 to 2021.Footnote3