September 20, 2023
The U.S. housing market peaked in June 2022, followed by seven months of declines. Activity looks to be picking up, but challenges lie ahead that could put pressure on the market, including high mortgage rates, a lack of affordability and waning demand for homes. So, is a U.S. housing market correction coming in 2023?
Home prices reached a new record in May 2023, coming in 0.7% higher than the previous peak in June 2022. This could come as something of a surprise given that mortgage rates are also at new highs of around 7%. According to Michael Rehaut, Head of U.S. Homebuilding and Building Products Research at J.P. Morgan, rates don’t need to fall to drive housing market activity — they just need to stabilize. “During a period of rising rates, the ground shifts quickly under consumers’ feet so they stop and freeze. Once rates stabilize, they can make a decision. That might be a smaller home, or a cheaper home in a different location, but whatever it might be, they are able to act, and activity can resume,” said Rehaut.
Home price momentum also comes down to the tightness of supply in the present market. “Despite high interest rates, low levels of housing inventory might be keeping a lid on home price declines,” said Murat Tasci, Economic and Policy Research Analyst at J.P. Morgan. “Home price data is now providing further evidence of a housing market that is stabilizing.”
Supply and demand are two of the key “push and pull” factors that determine the strength of a housing market. Demand for housing is climbing, however existing home sales are down.
Between 2020 and 2023, existing home sales peaked at 615k in June 2021. January 2023 saw just 231k in sales. The number of sales has remained below previous years in 2023, aside from a brief period in May where it surpassed the 2020 level.
Lower demand is tempered by a distinct lack of supply, though. Since the Global Financial Crisis in 2008, the U.S. has been adding about 1.2 million new households each year, yet the incremental supply of homes is growing at around 1.1 million units. On top of this, roughly 200,000 homes are demolished each year due to obsolescence or alternative use, meaning U.S. housing stock has fallen short of demand by around 300,000 units annually for the last 15 years.
“Housing stock is very tight right now,” said Anthony Paolone, Co-Head of U.S. Real Estate Stock Research at J.P. Morgan. “The 145 million units we have in the U.S. are being well utilized and vacancy rates are low.”
Housing affordability is at 30-year lows — so how can it be that the housing market is still so robust? “Last year’s property market was red hot before the rise in interest rates,” said Rehaut. “Let’s think of it conceptually. At that time, there were perhaps five buyers for every available home. Today, reduced affordability may have taken out some of those qualified buyers, but there are still two or three per home.” While affordability is low, it’s not holding the housing market back.
Rent increases are continuing to moderate in some of the U.S.’s largest MSAs as well as at the national level. Buying a property is currently cheaper than renting in 98% of MSAs — a sharp difference from 2012, when buying was cheaper than renting in more than 60% of MSAs. But while rent increases are moderating, they are still positive, averaging about 6% as the lack of affordability manifests itself in the market. “Renters have been staying in their units for longer, which is one piece of the puzzle,” said Paolone. “The Fed’s rate increases have made it more challenging for renters to move out and buy a home, in turn giving landlords added pricing power.”
With U.S. mortgage rates at 7%, demand for homes has taken a hit. This is because around 75% of existing homeowners have secured interest rates of 4% or lower, meaning they are more likely to remain in their existing property.
According to Paolone, this may dent the number of existing home sales but it won’t necessarily hurt house prices. “Existing home sales have come down a lot, almost to levels last seen during the Global Financial Crisis. But the distinction now is that housing market activity has not come down because the market is struggling or a bubble is bursting — it’s come down because people are staying put.”
With homeowners staying put, housing market activity decreasing and the market overall experiencing a deficit in supply each year, the amount of available properties is unlikely to increase substantially in the near term. In light of this, when homes do become available for sale, there is demand. “Pricing is just not really getting hit hard at the moment due to tightness of supply,” added Paolone.
“There will be some friction caused by lack of affordability,” said John Sim, Head of Securitized Products Research at J.P. Morgan. “However, supply is still very tight. If mortgage rates remain high, we may see some of the gains get chipped away, but this still means prices will end up flat overall for 2023 instead of moving lower.”
Where affordability may have some impact is in the rental market. “With affordability stretched, landlords have had more pricing power for longer than we expected,” said Paolone. “Over the next few quarters, a sizeable supply pipeline of apartments will be delivered — in combination with an economy that may moderate at some level – resulting in lower rental rate growth.”
A housing market crash akin to the events of 2008 is not expected in 2023. While affordability is low and mortgage rates are high, supply remains very tight, which should keep the market moving, avoiding a major correction.
It is unlikely that home prices will drop in the U.S. in 2023. J.P. Morgan Research expects home prices to moderate in the second half of 2023, reversing most of the gains earlier in the year and ending 2023 flat vs 2022.
Even though U.S. home prices have risen considerably over the last few years, this does not mean that the market is in a bubble. Conditions look much more favorable compared to periods when previous bubbles burst as demand currently far outstrips supply.
Housing markets are highly localized across the U.S., with disparity in housing supply and prices across regions. “Supply continues to be very regional, with areas in the Sun Belt seeing some recovery and areas in the East finally seeing a substantial increase in months of supply,” said John Sim. “However, to set this in context, supply is still incredibly tight. If we look at months of supply now vs before the pandemic, we’re not even close to the levels we had then. Recently, prices have just kept going up. The National Home Price Appreciation (HPA) Index showed that prices increased in the majority of the 50 largest MSAs during April. This is in sharp contrast to a year ago.”
Note: Months of supply = inventory/home sales. Data ending May 2023.
Source: J.P. Morgan, Redfin
Despite some recent increases, housing supply is still tight across 20 of the largest MSAs. The three-month average months of supply is highest in New York, NY at 3.7 and lowest in Seattle, WA at 1.
J.P. Morgan Research analysts predict that a major market crash does not lie ahead. The housing market is in a much healthier place than it was in 2008 and while the U.S. may face an economic downturn, lending has tightened considerably. With supply remaining so stretched, the likelihood of a property market bubble is low. 2023 looks to be a year of continued housing market strength.
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