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Panos Mourdoukoutas
Panos Mourdoukoutas
Articles (94) 

2 Red Flags for the Hot US Housing Sector

Rising long-term interest rates and declining affordability could cool off the space

February 22, 2021 | About:

The U.S. housing sector has been hot in a cold economy. Sales of previously owned houses rose by 0.6% month over month to 6.69 million units in January, ahead of market expectations. The median existing home price increased by 14.1% year over year to $303,900 in January as home inventory dropped by 26% to 1.04 million homes, the lowest on record.

Homebuilder stocks have been hot, too. Over the past 12 months, D.R. Horton (NYSE:DHI) is up 27% and Lennar (NYSE:LEN) has gained 23%, beating the S&P500, which gained 16% over the same period.

The run-up in both home sales and home prices may have come as a surprise to some. The housing sector is cyclical, faltering in recessions. But the pandemic recession wasn't the typical recession for a couple of reasons. One of them is the unprecedented monetary and fiscal stimulus launched early on in the Covid-19 pandemic, which helped maintain American households' purchasing power. Then there's citizens' urgency to move away from cities to suburbs, where housing markets have been hot.

But there are a couple of red flags signaling that things could eventually cool off. One of them is rising long-term interest rates. According to the Mortgage Bankers Association of America, fixed 30-year mortgage rates in the United States averaged 2.98% in the week ending Feb. 12, up from 2.80% in December.

Meanwhile, the yield on the benchmark 10-year Treasury note was hovering around 1.30% last week, double the level it was last summer and reflecting inflationary concerns arising from a recovering economy and additional fiscal stimulus.

Another red flag is the deterioration of the Housing Affordability Index, which measures whether a typical family makes enough income to qualify for a mortgage loan on a typical home at the national and regional levels.

According to data published by ATTOM Data Solutions at the end of December, the median home prices of single-family homes and condos in the fourth quarter of 2020 were less affordable than historical averages in 55% of counties with enough data to analyze, up from 43% a year ago and 33% three years ago.

Simply put, the average wage growth has lagged far below the increase in home prices, making it more difficult for buyers to afford to purchase a home. And the situation could worsen as long-term interest rates climb, raising the cost of financing home purchases.

We all know what happens when housing affordability declines: banks scale back on giving loans and the housing sector cools off.

Disclosure: No positions.

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About the author:

Panos Mourdoukoutas
I’m a Professor of Economics at LIU Post in New York. I also teach at Columbia University. I’ve published several articles in professional journals and magazines, including Forbes, Barron’s, The New York Times, Japan Times, Newsday, Plain Dealer, Edge Singapore, European Management Review, Management International Review, and Journal of Risk and Insurance.

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