Is the US housing market in danger of crashing?

In 2018, house prices in the United States rose for the seventh consecutive year. However, the upswing recently lost momentum amid stagnating sales figures. The debt ratio of private households has meanwhile fallen noticeably, but still stands at around 100% of income. Moderate loan granting as well as construction activity argue against an imminent fall in prices. Nevertheless, the risk of a sudden slump in demand and renewed rise in debt remains. But let’s take a closer look at the situation on this important real estate market. After all, the volume of mortgages in the USA exceeded the 9 trillion dollar mark again last year, with this last happening in 2008.

On a steady upward trajectory, US house prices returned to pre-crisis levels already two years ago and have even exceeded them. Over the course of last year, demand went into decline again for the first time since 2014. This was reflected in declining sales figures and slightly weaker price momentum, with a particularly noticeable deceleration in sales of existing homes. But the upward trend in new construction has also come to a halt. There can be little doubt that a gradual supply shortage also restrained transactions in both market segments. But if this had been the only factor of influence, price increases ought rather to have gathered speed.

Ultimately, it was other factors throttling demand for houses, such as higher prices and mortgage rates. The „affordability“ for private households has consequently deteriorated, but is still quite good by long-term standards.

To assess the appropriateness of the sales figures and demand, it is important to consider not just the absolute number of transactions. After all, the number of households and, by extension, the demand potential have risen significantly since 2007. If this is taken into account, the sales figures are solid and not „bloated“. This is also confirmed by taking a look at loan granting.

Overall, the situation on the US housing market is generally good, with the slightly tighter monetary policy of the US Federal Reserve also contributing to this. In 2018 alone, key interest rates were raised four times. For the house market, this was indeed an appropriate strategy for preventing the market from overheating.

The very good employment situation and solid growth continue to underpin demand for house ownership. But the deterioration in affordability, an important market mechanism that limits upward pressure on prices, is having a dampening effect. However, weaker sales resulting in a relaxation of loan granting conditions would give grounds for concern. For then, not only would price increases gather speed again, the debt ratio of private households would also rise rapidly after having improved only sluggishly in recent years and still at quite a high level.

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