House price growth cools as rents take off

The homeowner and rental markets are starting to swap places, with home sales and prices cooling as rental demand and rents take off. Rising mortgage rates have started to bring housing demand down, and we expect they will rise further over the next couple of years. Higher interest rates will also help cool rampant house price inflation, with month-on-month gains now starting to ease. However, we don’t think house prices will see outright falls and coupled with tight credit conditions that has shut out first-time buyers and pushed them to the rental market. Net apartment absorption saw a large rise in Q3, and multifamily rental vacancy rates are at 38-year lows on some measures. Alongside strong earnings growth that has led to a rapid recovery in rental growth. In turn that has driven strong investor interest in apartments and boosted total returns.
Matthew Pointon Senior Property Economist
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US Housing Market Chart Book

Rising mortgage rates to cool housing market in 2022

Housing market activity had a strong end to 2021, with sales and starts both rising. However, after a brief dip due to concerns over Omicron, mortgage rates resumed their upward trend and reached a nine-month high by the end of the year. A further rise in the 10-year Treasury yield means mortgage rates will rise further over the next few weeks. With lenders unlikely to significantly loosen credit conditions that will stretch affordability and cool the market. Indeed, there are now signs that house price growth is slowing and we expect it will fall from around 19% y/y now to 3% by end-2022. A surge in rental household formation is supporting demand, driving down vacancy and boosting rental growth. That has in turn attracted investors into the apartment sector, pushing yields to record lows and multifamily building permits to a 35-year high. Total returns will be a healthy 10% p.a. this year, before a gradual rise in yields pushes returns down to around zero by end-2025.

11 January 2022

US Housing Market Update

Material shortages hit housing completions

Shortages of materials and labour over the past year have not stopped builders from starting a lot more single-family homes. But they do appear to have prevented them from finishing them. That implies a surge of homes will be completed later this year as builders get hold of the last items needed to finish a property. With many of those homes already sold, we doubt that will boost the inventory of completed new homes. But it will allow the owners of those new homes to put their existing property up for sale, and that should finally help the existing home inventory to rise gradually later next year.

6 January 2022

US Housing Market Data Response

Mortgage Applications (Dec.)

After a brief dip due to concerns over the Omicron variant, both the 10-year Treasury yield and 30-year mortgage rate have since resumed their upward trends, with the latter rising to a nine-month high by the end of last year. That will help reverse the surge in housing demand seen late last year, with applications for home purchase set to fall back to where they were in mid-2021 over the next couple of months.

5 January 2022

More from Matthew Pointon

US Housing Market Update

Booming home sales fail to raise homeownership rate

Despite the exodus from cities and booming home sales last year, the homeownership rate in the third quarter was virtually unchanged from its level prior to the arrival of COVID-19. And with soaring house prices and tight credit conditions shutting out first-time buyers, we doubt it will rise much over the next couple of years. But there was a substantial increase in number of rental households in the third quarter, and we expect a further rise as cities reopen. That will keep the rental vacancy rate close to record lows, with the supply of larger single-family rental homes and multifamily units set to remain particularly tight.

4 November 2021

US Housing Market Data Response

Mortgage Applications (Oct.)

Mortgage rates rose to an eight-month high in October, which drove a significant decline in refinancing activity. But home purchase demand saw a much smaller dip, and we expect it will trend down only gradually as mortgage rates rise to around 3.5% by end-2021. After a period of stability, the average size of home purchase mortgages increased to $411,000 in October. That reflects a dwindling share of first-time buyers in the market and therefore doesn’t point to another surge in house price growth.

3 November 2021

US Housing Market Outlook

Rising mortgage rates will cool house price growth

Mortgage rates have risen to a six-month high and will increase further over the next couple of years. While inventory is set to remain tight, cutting the risk of an outright fall in house prices, that rise in interest rates coupled with tight credit conditions will bring house price growth down from its record high of close to 20% y/y now to around 3% y/y by end-2022. Higher financing costs will also weigh on existing home sales. But a healthier inventory means new home sales will see a gradual rise over the next couple of years. Strong new home demand will support housing starts, but a lack of materials and labour argues against a strong rise for the next year or so. The lack of homes for sale, and reopening of offices and cities, has led to a significant rebound in rental demand. That is feeding through to lower vacancy rates, a rise in rental growth and a supply response. A strong rental growth outlook has encouraged investors into the apartment sector, and that will push total returns up to around 19% this year. Beyond that, a gradual rise in yields from 2023 will pull returns down to around 2% p.a. in 2024-25.

28 October 2021
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