The US real estate market is showing resilience

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A downturn in the US housing market will come, but it won’t be like 2008.

After an unreasonably hot period for house prices following the COVID-19 pandemic, fueled by a new wave of suburban migration and historically low interest rates, experts are calling for a major real estate crash similar to that experienced during the Great Recession of 2008.

Nationally, home prices rose 10.4% in 2020 and a record 18.8% in 2021, according to the industry benchmark S&P CoreLogic Case-Shiller National Home Price Index. It’s an extremely rapid increase by any measure, and there’s reason to believe the music is about to come to a halt. Nationwide mortgage rates have doubled since a year ago to more than 6%, inflation is hitting consumers’ wallets and the US economy is poised to enter a recession.

During the Great Recession, house prices fell an average of 33% from peak to trough. Will house prices fall by that magnitude this time around?

Don’t bet on it.

The last financial crisis was caused by the real estate market, and real estate prices fell as expected. It was the product of widespread under-underwriting of mortgages. Many subprime borrowers took out adjustable-rate mortgages that they then couldn’t pay. This caused massive seizures. And with foreclosed homes flooding the market, home prices have plummeted and mortgage borrowers have become even more “underwater,” a phenomenon where the mortgage owed on the home exceeds its market value.

This time the fundamentals couldn’t be more different. Today, the quality of mortgages in general is higher. The average borrower FICO score is around 750 today, down from the high range of 600 in 2009. This means that borrowers today are more creditworthy and should be able to repay their loans, in average, at a higher rate than in the last recession.

Today, the owners also have record net worth. According to Black Knight, a real estate industry data provider, US borrowers have collectively amassed $11 trillion in equity, even leaving a minimum of 20% equity in their homes. Record high net worth, intuitively, also means that borrowers on average have low leverage on their homes. Today, homeowners owe mortgages averaging only 43% of their home’s value. In other words, the loan-to-value ratio is at an all-time high of 43%.

Consumers are less likely to default on their mortgages today. There will probably be very few forced foreclosures at knockdown prices, which was prevalent during the 2008 crisis and caused a downward spiral in house prices.

In addition to the strength of borrowers, the dynamics of supply and demand are also supporting prices. Persistent housing shortages in many markets are restricting supply. Freddie Mac, the federal mortgage agency, estimates that there are about 3 million homes short in the United States. It’s the result of a decade of home underbuilding in the wake of the 2008 crisis. Data from Black Knight indicates that only six of the 50 cities tracked have more real estate listings today than before the pandemic.

Why is this important? This suggests that housing demand continues to outstrip supply in most markets. And this imbalance keeps house prices stubbornly high.

Anecdotal evidence also supports these data. In speaking with several experienced real estate agents in northern New Jersey, they state that even though the number of offers well above the asking price has decreased, homes are still selling quickly and often above the asking price. Many potential buyers today are Millennials who have just started families and are quite determined and price inelastic, even with very high mortgage rates that make monthly payments more expensive.

Nevertheless, some markets are indeed experiencing price declines, especially in areas where prices have risen and new home construction has also boomed (eg Austin, Texas).

The co-CEO of national homebuilder Lennar, Richard Beckwitt, gave a “hot or not” summary of the U.S. housing market during the homebuilder’s quarterly earnings call in June. According to Lennar, the main markets are currently in Florida, New Jersey, Maryland, Charlotte, Indianapolis, Chicago, Dallas, Houston, San Antonio, Phoenix, San Diego, Orange and Inland Empire (in California). These areas still benefit from a restricted supply and positive migration trends. Markets seeing moderate home price declines include Charleston, Myrtle Beach, Nashville, Atlanta, Colorado, Reno, Salt Lake City, Philadelphia, Virginia and the California Bay Area.

As for the markets where Lennar has seen significant selling price drops? They include Los Angeles, Raleigh, Austin, Sacramento, Seattle, Minnesota and Central Valley (in California).

Real estate is a hyper-local asset class driven by local economies, migration patterns and recent new construction activity. Homeowners need to keep up to date with their local markets, but experts calling for a 40% drop in house prices will prove incorrect.

The opinions expressed in this article are the opinions of the author and do not necessarily reflect the opinions of The Epoch Times.

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Fan Yu is an expert in finance and economics and has contributed analysis on the Chinese economy since 2015.

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