Of the major sectors of the U.S. economy, housing has been the brightest and most resilient, as the COVID-19 pandemic and unemployment didn’t prevent millions of house hunters from buying homes across the country.
The National Association of Realtors (NAR) reported U.S. existing home sales surged in September to levels not seen in more than 14 years and prices for single-family homes across the U.S. increased 12% in the third quarter, the biggest annual jump in seven years.
The cost of housing is also rising everywhere. Prices rose from a year earlier in all 181 metropolitan areas measured by the group and 117 regions had double-digit gains, compared with only 15 in Q2, according to data published from the Realtor’s group in November.
Other data from the National Association of Home Builders (NAHB) survey marked a new all-time high for homebuilder sentiment in October, while September was the strongest month for existing home sales since 2006. September housing starts and permits report showed the highest levels for the important single-family data since 2007.
Source: National Association of Realtors
This broad based support for housing across condo sales, construction and multi-family units nationwide can largely be put down to ultra-low interest rates, which has meant mortgage rates are near record lows, fueling a surge in demand that has pushed buyers to compete for a scarce supply of listings.
Many buyers are rushing to the suburbs, looking for extra space as quarantine and working from home arrangements have become a more accepted way of life indefinitely.
"Some of the volatility in financial markets has led to a preference for houses as a store of value, because what we’re seeing is that by type of unit, by geography – the common factor is mortgage rates," said Feroli.
Based on past econometric modeling, J.P. Morgan Research found that a reasonable rule of thumb of a 100 basis point (bps) move down in mortgage rates is associated with a 10% increase in home sales. Since the beginning of the year, 30-year mortgage rates are down just under 100 bps and pending home sales are up over 9%.
And unlike in previous housing booms, this one has no correlation with lending to borrowers with lower credit scores.
Data from the New York Federal Reserve (Fed), which dates back to 2000, shows the average credit score for borrowers in Q2 this year was 784 and in Q3 it climbed to 787, the highest on record, compared to a low of 707 in 2006. According to the Fed Senior Loan Officer Survey, banks were still tightening terms on residential mortgage in Q3, so banks and lenders in general are not easing the conditions on which they are lending to potential buyers.
"The median credit score through Q3 at 787 was high – the highest we have seen in quite some time. So, it doesn’t look like this demand is being driven by unsound lending practices and in that sense is sustainable," said Feroli.
"Another reason the housing market recovered so quickly is that we experienced a pretty short recession, from February – May, which was too quick to really impact home buyer psychology. If we had a double dip that could change that mentality and we would see a more traditional recession dynamic. Certainly, that risk would be further amplified if we failed to get any further fiscal stimulus - that would be a risk to the overall economy and with it a risk to housing," he said.