Record home price growth coupled with surging mortgage rates are eroding US housing affordability, placing the sector squarely under the microscope. Rumblings of a possible housing bubble akin to 2008 have been growing louder.
However, I do not see a catalyst for a major US housing market correction anytime soon. While home price growth is expected to decelerate going forward, there remain long-term tailwinds that I believe are likely to keep US housing relatively expensive, while still allowing affordability to recover over time through income growth.
Home sales normalizing after record strength
In 2020/2021, US home sales reached their highest levels since before the 2008 global financial crisis (GFC), as many homebuyers “pulled forward” their purchases during the COVID pandemic.
Annual household formation drove much of that upward trend, peaking at around 3 million, but has since slowed significantly. As a result, home sales have moderated as well. Adding to housing-related concerns, US mortgage rates have risen by more than two percentage points in 2022 alone (as of 31 May). Meanwhile, the median US home price was recently the highest on record, making homes less affordable for many prospective buyers. I expect home sales to slow further amid continued declines in household formation, deteriorating affordability, and limited inventory (see below). In addition, other indicators that we track, such as consumer confidence and mortgage applications, suggest near-term weakness in homebuyer demand.
Even with these negatives, my longer-term outlook for home prices remains positive . Notably, US demographics look favorable for housing over the next decade. In 2020, there were 108.9 million Americans in the prime homebuying age group (25-49), which is projected to grow by 7.5 million by 2030 – a potentially powerful tailwind for housing demand in the coming years (Figure 1). So, while it may take some time for homebuyers to adjust to higher mortgage rates and less affordable housing, we believe that if they find the job market strong and mortgage credit readily available down the road, housing demand should rebound on the back of this demographic-driven tailwind.