26.06.2017 — Economics - US housing market: plenty of room for improvement

  • US housing activity is rising but remains well below pre-crisis levels. Critical fundamental and cyclical factors point toward sustained further gains, driven primarily by new residential construction.  
  • The rate of household formation, which has been running behind population growth, is expected to rise, supported by favorable demographics – sizable increases in the 25-34 and over-55 age cohorts. We forecast that 1.5m-1.8m housing starts per year are needed to meet demand. New housing starts have been running below these projections (annualized 1.2m year-to-date), reflecting in part supply constraints that will take a while to abate.
  • Cyclical factors are also favorable for housing: low unemployment and rising personal incomes, low mortgage rates and improving household balance sheets. The solid level of consumer confidence is an additional plus.  
  • The supply of homes available for sale and rent is very low, causing a re-acceleration in home prices, and constraining sales. 
  • Although mortgage rates are near historical lows – despite three Fed rate increases since December – mortgage credit remains tight, with the median credit score for new mortgage originations markedly higher than it was pre-crisis. This has locked some creditworthy potential buyers out of the market. We forecast moderate increases in mortgage rates, as the Fed continues to gradually raise its policy rate and begins to reduce its balance sheet, but not enough to choke affordability. 
  • US housing accounts for a small share of GDP, but its impact on the broader economy is wide. It generates significant jobs in construction and other specialty sectors, and boosts purchases of appliances, electronics, building supplies and furniture. The anticipated strengthening in the housing sector is good news for overall economic performance.