The Rise and Fall of American Real Estate

  With the rapid tightening of monetary and financial conditions, U.S. real estate sales have cooled sharply, and it is a high probability that housing prices peaked around the third quarter year-on-year.

  From the perspective of GDP expenditure method, US real estate investment (at constant price in 2012) accounts for less than 4% of GDP; from the perspective of industry added value, the annual added value of the real estate industry exceeds 2.5 trillion US dollars, accounting for more than 10% of GDP. The upstream and downstream industrial chain of real estate is complex, and related industries account for about 10% of GDP, and often closely follow the changes in the real estate boom.
  More importantly, due to its high sensitivity to the interest rate environment, real estate investment often leads the changes in other investment sub-items in cyclical fluctuations, and is one of the important leading indicators of economic activity. In previous economic cycles, the trend of real estate investment generally leads the trend of non-real estate investment by 3-6 quarters.
  Looking back on history, real estate sales in the United States have a clear cycle of reciprocation. The average span of each real estate cycle is about 60 months. In each cycle, demand is the dominant variable, with the sales side leading the investment side. Just because the gap between supply and demand has an obvious cyclical pattern, real estate inventories also show cyclical changes.
  The reason the property cycle closely follows the interest rate cycle is that changes in new home sales, the leading indicator, are primarily driven by mortgage rates. Therefore, the reciprocating cycle of the Fed’s policy interest rate affects changes in real estate sales, which in turn affects changes in real estate investment.
  In U.S. real estate sales, in addition to new home sales, existing home sales are larger in volume, often accounting for more than 85%, and the historical trends of the two are roughly synchronized.
  From the demand side, what determines real estate sales is the ability and willingness to buy a house. The former depends on interest rates and income, while the latter depends on housing demand and housing price expectations. Residents’ housing purchasing power is the “cornerstone” that determines real estate sales and an important leading indicator, mainly driven by mortgage interest rates and disposable income. Among them, the mortgage interest rate is the core driving force in determining the purchasing power of housing. In terms of the willingness to buy a house, factors such as office address, improvement and replacement, and expectations of rising house prices may all affect residents’ willingness to buy a house, which in turn affects real estate sales.
  The reshaping of the employment ecology caused by the epidemic has made residents more willing to buy properties in the suburbs, and the further strengthening of the expectation of rising house prices has in turn boosted residents’ enthusiasm for home buying.
  Since the Federal Reserve started the rate hike cycle in March 2022, with the rapid tightening of monetary and financial conditions, real estate sales have cooled significantly. The U.S. 30-year fixed mortgage rate rose rapidly from around 3% to nearly 6%. For buyers of mid-priced homes, record home prices and rising interest rates are making monthly mortgage payments about 64% more expensive than buyers in the same period in 2021, equating to an $800 increase in monthly repayment stress. more dollars. In this context, the annualized sales of new homes and existing homes dropped rapidly from 790,000 and 5.93 million units to 700,000 and 5.41 million units respectively. However, as the supply bottleneck has not been effectively alleviated and the inventory level is too low, house prices are still in the peak-seeking stage year-on-year.
  With supply still limited and demand steadily improving, energy prices represented by crude oil are starting the second wave of gains this year. The inflationary pressure caused by the recovery of superimposed service consumption is also being released. In the future, the U.S. inflation rate may rise further. The pace of interest rate hikes (a single 50BP is the benchmark, and the possibility of 75BP is not ruled out) will still be a necessary choice for the Fed. Considering the historical relationship between mortgage interest rates and the year-on-year trend of housing prices, combined with measures such as the eviction ban, which will expire in July, it is a high-probability event that housing prices peak around the third quarter.
  When the Federal Reserve started the interest rate hike cycle, the corresponding CPI was mostly 2.5%-3% year-on-year. Obviously, this round of policy lag is far more than in the past. Sustained high inflation has become the most important macro variable affecting the social stability of the United States; a monetary policy that is a bit slower can only be tightened in a “catch-up” style and continue to maintain high-intensity tightening. From a longer-term perspective, a “one-step slow” response could lead to an increased risk of a “hard landing” in 2023.
  Under the neutral scenario, from the second half of 2022, the contribution of real estate investment to GDP may turn negative, and related durable consumer goods may also be affected. However, due to more than 10 years of deleveraging in the residential sector, coupled with relief policies during the epidemic, residents’ balance sheets have remained relatively healthy, which may make the risk of a crisis in the real estate market relatively controllable. Since 2008, the U.S. resident leverage ratio has fallen from a peak of 98% to 80%. At the same time, after the “subprime mortgage crisis”, the US banking system has paid more attention to the quality of housing loans than before, and the proportion of subprime loans has been suppressed at around 2%. Under the combined influence of the above factors, the risk of a crisis in the real estate market in the future may be relatively controllable.