Does the US housing market once again pose a threat?

The US housing market has over the last ten years recovered from its devastating crisis. However, at first sight some indicators are strongly reminiscent of the situation shortly before the subprime bubble burst. The Case-Shiller U.S. National Home Price Index for the 20 largest cities, for example, looks set to regain its pre-crisis level this spring. This is a cause for concern since the rapid price deterioration in 2007 started in the big cities. The most pronounced price exaggerations were also to be found there. Nevertheless, for the time being the housing market is unlikely to pose serious threats to the economy in our opinion. One important condition in this regard is, however, that the tighter loan approval guidelines continue to apply.

In the final analysis, stricter financing conditions have led to the percentage of owner-occupied dwellings falling since the last crisis. Above all young families have drifted into the rental segment. These first-time buyers are thus entering the property market at a later point in time, namely once they have accumulated the necessary equity. The steady price rise in recent years has led to the affordability of a house for the private household visibly falling again, as can be seen from a realtor association index. After the crisis real estate had become affordable again due to the price drop and the fall in interest rates. Ultimately, “one’s own four walls” are now still much more affordable than in 2007.

Good affordability has also pushed sales figures up significantly over the last three years. In order to really be able to judge whether market activity is overheating again, sales figures should be compared to the number of private households. The latter figure has risen by around 11 million since 2007! If this is taken into account, the sales figures do NOT point to overheated market activity.

Construction activity also remains an important factor for the future development of the supply side. Building statistics paint a moderate picture in this regard: the number of housing starts more or less moved sideways in the past year. The picture is even more restrained if the number of private households is placed in relation to building activity. The long-term average amounts to about 13 houses built per thousand private households, whereas of late the figure has been less than ten houses. In other words, there are at present no grounds for alarm.

One should certainly not forget that private households in the USA remain highly indebted, even if the situation has now eased somewhat. Last year, indebtedness as a ratio of disposable income was actually around 105 percent, as against 134 percent in 2007. Moreover, for four quarters now the indebtedness ratio has tended slightly upward again, albeit at a rate of only one percentage point.

Good labour market conditions and low interest rates will also buttress demand for houses in 2018. However, the rise in house prices is only slightly slower and interest rates are rising, leading to a further deterioration in properties’ affordability. This in turn dampens demand-side momentum. As long as there is no short-term easing in loan approvals, growth in the housing market should slow at an orderly pace. An unexpectedly clear increase in building activity could, however, become a risk. The moderate Fed policy is, by contrast, unlikely to cause turbulence. A careful eye should be kept on building activity in the coming months, in particular given the buoyant housing construction sentiment. An excessive expansion in supply would translate into falling house prices.

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