Housing Market Set To Stall

Summary & Key Takeaways

  • Through higher mortgage rates, demand for US housing is beginning to wane.

  • This will have significant cyclical implications for house prices.

  • As house prices growth slows or rolls over and given housings cyclical importance to economic growth, the housing market will move from a tailwind of economic growth to a headwind.

  • However, the structural outlook for the housing market remains on solid footing, and as such any pull-back in house prices will not resemble anything like what occurred in the Great Financial Crisis. Structural undersupply, favourable demographics for first home buyers and solid consumer balance sheets will help provide a floor for the housing market in the years ahead.

The Importance Of The Housing Market

With house prices having increased in value by over 20% this past year, there is now mounting evidence to suggest this trend in housing appreciation is not only set to stall, buy may indeed roll over in the year ahead. Understanding the cyclical and structural standing of the US housing market is a critical component of assessing the business cycle, as any move lower in housing will have critical implications for the economy.

According to the National Association of Homebuilders, the activity in housing through the mechanisms of residential investments and housing related consumption spending contributes to around 15-18% of GDP. As such, real estate cycles should be monitored with in-depth consideration as housing is one of the most cyclical parts of the economy and thus one of the major cyclical drivers of economic growth and consumer welfare. After all, real estate is the biggest asset class on the planet.

Source: Macro Alf

Due to housing’s sensitivity to interest rates and the close associated of housing and construction, a downturn in housing activity and housing-related spending is a warning sign that the tailwind to the economy that has been the US housing market of late may now be turning into a headwind.