Housing prices are rising at the fastest pace in four decades at the same time that forbearance and renter relief programs are rolling off. Fears of a housing price correction are unlikely to play out though, and J.P. Morgan Research analysts expect the housing market—which encompasses 15% of the U.S. economy—to remain among the most resilient sectors, finding few parallels to the 2008 housing crash. However, there could be a different crisis ahead as we are seeing housing affordability stretched compared to past cycles despite stimulus and renter relief programs during the COVID-19 pandemic.

While a significant rise in foreclosures or delinquency rates is unlikely as lending standards have greatly improved since 2008, the surge in house prices reflects a nationwide housing shortage. Record house price gains are raising concerns about inflation and affordability as housing services—including construction and consumption—encompass nearly one-third of the overall consumer price index and nearly 15% of personal consumption expenditure prices.

Fears of a post-pandemic housing affordability crisis have been building as demand appears to have peaked while housing inventory is coming off its lowest levels amid the September 30 expiration date of the U.S. mortgage forbearance program. In this report, we examine the structural factors related to supply and demand, increasing concerns around housing affordability and housing shortages as well as the broader outlook for the global housing market.

Since the early twentieth century, housing prices in the United States and other developed countries have continued to rise.

But major world events have caused drastic fluctuations in property value.

During the COVID-19 pandemic, for example, the housing market remained resilient. Record demand outpaced the number of homes available which caused prices to increase at their fastest pace in forty years. It’s unclear if, and when, housing prices will cool off.

So, what causes home prices to rise and fall?

This is the housing market, unpacked.

Supply and demand ultimately determine house prices, but there are additional factors that can affect the market.

The cost of building impacts supply – particularly when supply chain delays make it challenging to get materials.

Labor also plays a part in the market. The construction sector still employs fewer workers than before the pandemic despite the increased demand for homes.

The U.S. Federal Reserve typically lowers interest rates to boost economic activity.

During the pandemic, for example, the Fed lowered short-term interest rates to near zero and mortgage interest rates fell to the lowest levels on record.

Inflation is the average increase in prices consumers pay for goods and services.

The Fed aims for two percent inflation annually, but it can rise and fall depending on changes in supply and demand.

Home prices and rents tend to move along with overall inflation. If the average prices of goods, services, wages, and business costs are rising rapidly, home prices and rents will likely rise quickly, too.

But sometimes housing costs can increase more rapidly. That’s what happened with single-family homes when demand surged during the pandemic.

Following World War II, populations grew, and urban areas developed into vibrant economies with high-paying jobs.

People moved closer to cities, so demand increased. Supply became limited in these high-density locations, and space restrictions and zoning laws made new constructions challenging.

The demand began to outweigh the supply, so prices increased.

It’s estimated that housing prices have nearly tripled since the 1950s – even after adjusting for inflation.

During the Global Financial Crisis in the early 2000s, home prices plummeted.

Households took on large mortgage debts to enable home purchases. With so many people looking to buy homes, a building boom happened across larger states where plenty of land was available for construction.

This created an overabundance in supply and homes were sometimes priced much higher than the cost of land and construction.

Prices eventually tumbled during the recession, falling 34 percent by 2012.

The remote work requirements of the COVID-19 pandemic had people re-evaluating their space and location needs. Consumer spending shifted from things like traveling and dining out to home office furniture and electronics.

As priorities shifted, the housing market saw an initial drop in desire for dense, expensive cities like New York, San Francisco, and Washington D.C.

… and more interest in less dense, more affordable areas like Miami and Dallas.

Millennials – who make up about 25 percent of the US population – have always been reluctant to move out of these cities, preferring to rent.

But during the pandemic, Millennials began prioritizing space over job proximity. As they searched for homes outside of cities, they contributed to the rise in suburban house prices.

Demand for urban housing eventually returned, but also remained steady in the suburbs.

This heightened interest applied to all types of builds, whether an apartment or single-family home.

Questions still remain – is the U.S. in a housing bubble? Will prices fall?

Not necessarily.

Rapid price increases don’t mean a correction will happen. History has shown that prices can rise quickly over the years… only to stabilize or even keep climbing.

Six key questions on U.S. housing affordability, home sales and the wider sector outlook

1. Are housing prices rising? How does the current level of home price appreciation compare to previous cycles?

Across the globe, housing prices are rising at the fastest pace we’ve seen in 40 years, tracking 13% (as of 2Q21) above pre-pandemic levels. According to models from Jesse Edgerton, Senior U.S. Economist, the risk of a 20% decline in real house prices within five years remains low across developed countries. Recently, there have been rapid increases in price/rent ratios in Canada and New Zealand specifically, but overall, most countries score pretty low on these correction metrics.

Model-based probability of 20% decline in real house prices within 5 years

Table depicting house prices globally, which are rising at the fastest pace in 40 years.

As of spring this year, Home Price Appreciation (HPA) remains above 14% in the U.S. and increases continue to rally month-over-month at three times pre-pandemic levels. Michael Rehaut, Head of U.S. Homebuilders and Building Products Equity Research, notes that existing home inventory remains at extremely low levels with new homes for sale at a record low.

Low interest rates have also supported the wider availability of cheaper mortgages. With every 1% move down in mortgage rates, J.P. Morgan’s economics team sees a 10% increase in home sales. Since the onset of the pandemic, 30-year mortgage rates are down 59 basis points, while home sales have risen by 12%. Housing inventory, which was already constrained pre-pandemic, dropped to historic lows during the pandemic but is now coming off its lows in recent months. As of June, the median price of sold existing homes hit a new high of $363K.

When demand slowed, there was some debate on whether the lack of inventory kept buyers away. However, another factor—housing affordability—also greatly impacts demand. Rising HPA is mainly driven by housing shortages across the U.S. and it is expected to revert back to income growth with +7% in 2022, 5% in 2023 and trend lower towards 3% in the years ahead as forecasted by John Sim, Head of Securitized Product Research. Overall, housing inventory on average is down 20% compared to last year, but rose 6% on average across the 23 markets tracked by J.P. Morgan Economic Research.

Inventory, already constrained pre-pandemic, dropped to historical lows during the pandemic

Annual rates of existing homes available for sale (mn,nsa)

Line chart depicting housing inventory, which dropped to historical lows during the pandemic.

Demographics have also contributed to the housing demand. With low interest rates making mortgages historically affordable for qualifying homeowners and the pandemic migrating the millennial generation away from the rental market into home ownership, housing demand has continued to surge despite inventory constraints. Millennials have typically waited longer to purchase a home due to affordability, as student loan debt represents a higher share of household debt—student loans reached a record high of $1.4 trillion in 2019. The Biden administration has extended student loan repayment, interest and collections until January 2022 and recently used executive action to cancel nearly $10 billion in federal student loans this year. Further student loan forgiveness could boost first-time homeownership rates for young borrowers. Alleviating student loan debt could help an estimated 2 million young adults who have historically been locked out of the housing market according to Amy Sze, Head of Asset-backed Securities Research. Demographics are also supportive of increased housing demand as the number of people becoming 30 years old will average 4 million, which is 18% higher than the 1998–2005 period.

2. What is the risk of the housing bubble bursting?

The factors that fueled the housing price run-up before the Global Financial Crisis (GFC) centered on excessive leverage as $4 trillion of home equity was extracted through cash-out refinances against a backdrop of inadequate lending standards and poor risk controls that led to higher defaults. In 2007, housing affordability had been squeezed and housing had shifted from an acute to a prolonged drag on growth, accompanied by drags from tighter subprime lending conditions. By 2008, there were massive imbalances in the financial vehicles that were historically levered to high levels of housing prices. When issuers realized the significant rollover risk, the credit crisis rapidly changed its tune to a liquidity crisis. On top of this, borrower leverage through home equity withdrawal also exacerbated the GFC. By the end of the year, the housing market quickly collapsed and government-sponsored enterprises Fannie Mae and Freddie Mac, after buying large volumes of these mortgages from banks and reselling them as mortgage-backed securities to investors, required a bailout.

Looking at today’s housing market, there are few similarities to the GFC or signs of a housing bubble. The following factors which contribute to the housing market are in far better shape than in 2008:

  • Securitization, which provides over half of all consumer credit in the U.S. economy
  • Lending standards
  • Banking sector cash deposits: $9 trillion in 2013 vs. $17 trillion and growing in 2021

Household debt-to-income ratio also dropped to 8.23% in Q1 2021 which is the lowest level recorded since the Federal Reserve first started tracking in 1980.

Household debt service ratio

Percent of disposable income going to debt payments

Line chart depicting household debt-to-income ratio, which plummeted to historical lows in the first quarter of 2021.

Even in states that have seen the highest increases in housing prices like New York and California, there are few signs of the kind of debt growth witnessed during the housing boom leading up to the GFC.

3. Which regions will be impacted by housing affordability?

Since the pandemic, income inequality and the wealth gap have increased and home prices have risen much faster than household incomes. Compared to levels two decades ago, the overall wealth of families has yet to recover from the GFC. More specifically, the growth in household income has slowed to an annual rate of only 0.3% since 2000 compared to an average rate of 1.2% from 1970 to 2000; the share of adults who live in middle-income households fell from 61% in 1971 to 51% in 2019 while income growth has been the most rapid for the top 5% of families, according to the Pew Research Center1.

According to Kaustub Samant from Residential Mortgage-Backed Securities Research, the J.P. Morgan Housing Affordability index is the most stretched since 2008. This means that the ratio of monthly mortgage costs to median income is now at levels last seen in 2008.

Our affordability index shows that housing affordability is the most stretched since 2008

Ratio of monthly mortage housing costs to median income (%)

Line chart depicting the J.P. Morgan Housing Affordability Index, which is at the highest levels since 2008.

The West Coast is the region with the least amount of affordable homes.

Regionally, affordability is most stretched in the West Coast

Ratio of monthly mortgage housing costs to median income (%) by MSA

Map depicting ratio of monthly mortgage costs to median income, which is highest on the West Coast.

In developed markets outside of the U.S., the growth of home prices remains a global phenomenon since the pandemic. Home prices are now above long-run trends and income will need to increase to match housing prices in order to balance affordability.

House price growth since the pandemic is a global phenomenon

% change since Q4 2019 (annualized rate); Turkey: +29%, Philippines: -12%

Bar chart depicting the percentage change in house prices globally, which is highest in Turkey and lowest in the Philippines.

Within the U.S. rental market, COVID-19 has only placed housing affordability sharply into focus. Fiona Greig (co-President of the JPMorgan Chase Institute) and her team analyzed samples of households that could be confidently categorized as either renters or mortgage holders and found that renters tend to have lower incomes than homeowners, had less of a savings buffer entering the pandemic and were more likely to have lost their jobs and experienced large declines in labor income.

  • 43% of homeowners reported loss of employment income compared with 59% of renters during the pandemic
  • 33% of renters lost at least 10% of their labor income during COVID-19 and renters also received unemployment benefits at a higher rate than mortgage holders, indicating a higher rate of job loss


4. As stimulus begins to erode, what is the outlook for mortgage forbearance and delinquency rates?

Although the Biden administration has not extended the mortgage forbearance program which expired on September 30, the spike in foreclosures is expected to remain minimal compared to the numbers from the GFC. With demand continuing to outpace supply given current demographic shifts and low construction, market impact will remain manageable.

Recent announcements from the Federal Housing Administration and the Consumer Financial Protection Bureau have also set the stage for forbearance to end in the near future with loan modifications likely to increase. Government entities have refreshed their modification terms to ensure that borrowers get adequate payment relief, making modifications an attractive option for borrowers to end forbearance. According to research conducted by the JPMorgan Chase Institute, one-third of homeowners in forbearance made all payments to date while a relatively small fraction of homeowners who were not in forbearance missed payments. This suggests that the one-third population signed up for forbearance as a precaution especially with the measures passed by the CARES Act in case of sickness, job loss or disruption.

5. How is the broader commercial real estate market faring?

The pandemic fallout has so far been better than initially feared for the commercial real estate market. Sectors like hotels and multifamily markets are already seeing a bounce back in rents and will continue to recover broadly while office and retail property prices will continue to lag. Multifamily lower-quality (class B/C) properties have proven their resilience as the housing affordability crisis grows.

The disruptions in the hotel market will likely remain transitory as tourism picks up after vaccination rates climb. With the re-opening of offices, office and multifamily rent has grown in major markets but the question of sustained remote work may reverse this trend and it remains unlikely that it will return to pre-pandemic levels.

With the explosion of e-commerce during the pandemic, brick-and-mortar retail like regional malls have underperformed while essential retail like groceries and pharmacies have held up very well. In areas with higher discretionary income, neighborhood and strip centers can outperform larger regional malls and power centers.

6. How has the market changed for mortgage originations and servicing since the pandemic?

Kabir Caprihan, Banks and Non Bank Credit Research, sees a shift in mortgage originations and servicing from banks to non-banks with nearly 56% of servicing now outside of the banking system. This refinance boom was driven by record low rates that allowed non-bank originators to capture market share versus traditional banks.

Non-bank originators raised around $12 billion of public capital since the start of 2020 and are under pressure to achieve market share goals in a declining market. The broker and corresponding channels that are experiencing the most price wars were barely profitable for some originators in 2Q21. Caprihan expects some consolidation in the space to take out overcapacity as well as rationalizing among the players, but the transition process will be challenging for smaller originators.

Pie charts depicting banks’ and non-banks’ share of mortgage origination; the latter’s share increased between 2006 and 2021.

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