In 2021, the U.S. housing market experienced a positive trend, that may even be defined as a boom. In fact, during the post-lockdown period, the demand from first home buyers has increased due to both increasingly frequent smart working, millennials market entry and, finally, due to the interest rates at historic lows. The residential market has seen, and still sees, first home buyers as the real market movers, those who have power to influence market dynamics. Looking from the supply side, it turns out to be insufficient. The first early reason goes back to the freeze of new construction In response to the 2008 subprime crisis (the high-risk financial loas provided to clients with a high risk of default). In addition, after a steady but Insufficient recovery of new construction, the supply was affected again by the lockdown and the shortage of building materials. All of this has made existing homes particularly prominent. While the supply stayed bound to the availability of homes throughout the U.S. territory, the demand has steadily increased and, given than first home buyers usually require a mortgage to buy, interest rates emerge as the key players of the U.S. housing market.
However, 2022 has experienced a trend change, with a significant increase in mortgage rates. This inevitably led to a significant contraction in the market, consequently lowering the demand.
The 2008 scenario seems, however, to be unrepeatable. Financial conditions, referring particularly to mortgages, are not comparable to those of about 15 years ago. Adjustable-rate mortgages are no more than 10% of the total in the U.S. nowadays, with respect to the 2008 when they were more than 35%. The vast majority of existing mortgages is, therefore, stuck at Interest rates significantly below the current market rates. What is more likely happening is that the exploits of 2021 and early 2022 are being absorbed by the ongoing adjustment of real estate values. Certainly, prices need to be closely monitored but, at the same time, it is advisable keeping and eye on another indicator, that is forbearance, temporary deferrals of loan-related payments. This indicator acts as an anticipator of potential future non-performing loans. It is exactly the different dynamics of mortgages that is one of the main reasons why the so-called forbearance rate is now still very low.
Currently, substantial unmet demand is shaping up within first home buyers that could be reflected on the market as soon as mortgage interest rates will drop.
For the near future, after a noticeable slowdown in the market, the hypothesis that seems to be most plausible depicts a possible new boost in demand versus an almost fixed supply. The latter, in fact, Is related to new construction which, however, does not seem to be taking place: difficulties affecting construction are increasing because of the rising labor, material and financial costs. The consequence is the reduction or, even worse, the freezing of new construction sites.
A possible harsh and persistent economic recession, however, could affect the scenario just outlined. This, however, could have different causes, and consequently generate different effects.
Indeed, any exogenous causes, such as further escalation of the conflict in Eastern Europe, would, unfortunately, have not easily foreseeable effects. Similarly, possible mitigating and protective strategies also cannot be hypothesized at the moment. On the other hand, referring to endogenous causes, the persistence of FED's restrictive monetary policy could trigger a recessionary spiral, that would lead to further slippage in the satisfaction of the first home demand. However, it must be kept in mind that among FED's statutory objectives, all of equal Importance, Is not only the price stability but also the maintenance of high employment and a sustained economic rate of growth. For this reason, the FED could revise its current restrictive monetary policy not only in the event of clear success in combating inflation, but also if there were to be a sharp economic downturn or a sharp contraction in the labor market.
Regarding housing rents, the 2008 crises, and also that of the 2020, suggested us that rents tend to absorb well any economic contraction, reacting in a limited and delayed way. Basically, there are significantly more tenants In the United States with respect to other markets In Europe and elsewhere. This is due to affordability and strong social mobility. However, the default of the rent payment quickly leads to the eviction which, given the substantial scarcity of social rescue networks, frequently results in being homeless. These peculiarities make non-payment of rent an event with very serious consequences for the lives of defaulting tenants.
In the 2008 crisis, for example, the increase in rents, although lower, survived the collapse of both the stock markets and the real economy. We have also seen a steady increase in tenant-occupied housing units as a considerable proportion of those who have had their homes foreclosed on have opted for this solution. What Is happening now Is somehow similar. In fact, first home buyers who cannot buy a home because of the high cost of mortgages are settling for a rental home, leading to increased pressure on rents.
