The US real estate market is showing signs of collapse, with trading volume at its worst since the 2008 financial crisis
Image Source/Visual China
Wen | Jin Yan
The serious slowdown of the US real estate market has lasted for more than a year, and this trend has not been alleviated. At the same time, the yield of US long-term treasury bond bonds has surged to the highest level in more than 10 years. As the benchmark interest rate of the global capital market, the yield of 10-year US treasury bonds once approached the 4.9% threshold, leading to the high mortgage interest rate, which has recently soared to the highest level in 23 years, These factors have combined to drag home sales in the United States to their lowest level since the subprime crisis.
On October 18th, US Treasuries experienced another large-scale sell-off, with benchmark 10-year yields approaching 5%. The 10-year yield surged 11.8 basis points to 4.845%, setting the highest closing level since July 25, 2007. In the 30-year US Treasury market, the closing interest rate is 4.927%, second only to the highest yield since 2007, which was 4.973% on October 6th. Short end interest rates have risen even more aggressively, with the two-year US Treasury yield rising by 14 basis points to 5.24%, setting a new 17 year high since 2006.
Behind the continuous rise in interest rates is the latest warning signal from the market for a decline in demand for US government bonds, with yields on US Treasury bonds rising from 3 months to 30 years on the same day. Among them, the yields on 3-year, 5-year, and 7-year US bonds all surged by 15 basis points. Due to market expectations that the Federal Reserve will continue to raise interest rates, all three major US stock indices closed lower. At the same time as US bond yields rose, the average interest rate on 30-year fixed rate mortgages in the United States also broke through 8% this week, marking the first time since mid-2000.
This extreme high interest rate level is likely to further impact transactions in the US housing market. In the long run, if buyers purchase a house worth $400000 with a 20% down payment, their monthly mortgage expenses will be nearly $1000 more than two years ago.
Nowadays, potential homebuyers and homeowners in the United States are troubled by high interest rates - buyers want to buy but cannot afford it, and the rate of mortgage interest rate hikes has turned away most people with a desire to buy a house; Homeowners are sitting on low interest rate mortgages from a few years ago, without seeing any incentive to sell their homes. The buyer and seller continue to move in the opposite direction. Currently, only those with high incomes or a large amount of cash can afford to buy a house. Doug Duncan, Chief Economist and Senior Vice President of Fannie Mae, predicts that the environment of rising mortgage rates will continue to suppress housing activity and further complicate housing affordability until 2024.
In the second quarter of 2009, US household mortgage debt accounted for 65% of disposable income, with a peak of 100% at the beginning of the financial crisis. The ratio of mortgage debt to real estate assets (i.e. loan to value ratio) was 27% in the second quarter of 2023. Photo by Jin Yan, a journalist from Caijing
According to data from the National Association of Real Estate Agents, Americans' affordability to buy a house fell to its lowest level since 1985 this summer. Economists predict that sales of second-hand homes will decline to at least the lowest level since 2011 in 2023. At that time, the population of the United States was relatively small, and the US housing market slowly struggled to recover from the unprecedented subprime crisis.
According to an analysis by real estate brokerage firm Redfin in June, about 92% of mortgage homeowners in the United States have mortgage rates below 6%. Zillow's data shows that 80% of mortgage homeowners in the United States have mortgage rates below 5%. With 30-year mortgage rates approaching 8%, homeowners may not be interested in selling their homes as they may have to purchase another home with a higher interest rate. According to Realtor.com, the inventory of unsold properties in September decreased by 4% compared to the same period last year.
According to data from Freddie Mac, the average interest rate on 30 year fixed rate mortgages in the United States has recently risen to 7.57%, and has risen by about 50 basis points since August - when mortgage rates in the United States exceeded 7% for the first time in nearly a year, and home sales fell to their lowest level since January.
Edward J. Pinto, a senior researcher at the American Enterprise Institute (AEI) and former CEO of Fannie Mae, told Caijing, "We are experiencing one of the most severe housing crises in American history. This has led to a record high number of homeless people, and an entire generation is confident that they will never have housing, which is an important symbol of entering the American middle class
According to Chen Zhao, the head of economic research at Redfin, the total sales of existing homes in the United States are expected to be around 4.1 million in 2023, which will be the lowest annual sales level since the collapse of Lehman Brothers in 2008 and the global financial crisis. Zhao stated that due to the possibility of mortgage interest rates remaining at high levels, it is unlikely that sales will rebound significantly next year. She pointed out, "We will face a considerable period of freezing.
The depression of transactions in the US real estate market this year is quite different from the previous slowdown after the bursting of the real estate foam in the first decade of this century. At that time, the US economy was in a deep recession, with millions of homeowners losing their homes due to foreclosure. This time, due to rising borrowing costs, record high housing prices, and limited inventory of unsold properties, the slowdown in home sales has actually been ongoing for over a year. Recently, the rapid increase in mortgage interest rates has led to all but the most determined homebuyers withdrawing from the trading market.
Limited housing inventory, high housing prices, and labor shortages will continue to be unfavorable factors in the US real estate market. Due to the fact that housing price growth still exceeds income growth, the affordability of homebuyers will continue to be a problem in the future. Photo by Jin Yan, a journalist from Caijing
Jeffrey Young, former global head of foreign exchange at Citigroup and co founder and CEO of DeepMacro, pointed out to Caijing that the United States is moving towards a higher level of currency re inflation. Considering that inflation pressure has only fallen below the trend level for a very short period of time, we interpret it as unfavorable to interest rates, which means that interest rates will continue to rise.
It has been proven that the biggest variable affecting the inflation rate in the United States is housing. The rise in rent is the main driver of core inflation. The latest inflation data shows that inflation in the United States remains stubbornly high: the US CPI rose 3.7% year-on-year in September, unchanged from August's growth rate and higher than expected at 3.6%, marking the third consecutive month of rebound; The month on month growth rate slowed to 0.4% from 0.6% in August, but exceeded the expected 0.3%; The year-on-year growth rate of core CPI has slowed from 4.3% in August to 4.1%; The core CPI month on month growth rate remained unchanged from 0.3% in August. The US PPI in September increased by 2.2% year-on-year, surpassing expectations by 1.6%, marking the third consecutive month of exceeding expectations and a significant rebound from August's 1.6%, marking the largest year-on-year increase since April; The PPI increased by 0.5% month on month, also exceeding the expected 0.3%; The core PPI increased by 2.7% year-on-year, with an expected 2.3%, a significant rebound from August's 2.2%; The core PPI increased by 0.3% month on month, with an expected 0.2% increase.
The reasons for inflation exceeding expectations come from three aspects:
Firstly, the growth rate of owner equivalent rent (OER) in housing rebounded month on month, secondly, the transmission effect of rising oil prices is still present, and thirdly, the stickiness of inflation in services other than housing still exists.
The CPI housing index includes two main sub items: rent of primary residence and owners' equivalent rent (OER). The former corresponds to the rent of rental housing, with a weight of approximately 7.6% in the CPI, while the latter reflects the cost of self housing, with a weight of approximately 25.6%. In September, the rent of major residences increased by 0.5% month on month, which was unchanged from the previous month. The equivalent rent of homeowners increased by 0.6% month on month, rebounding from the 0.4% increase in the previous month. The rebound of the latter has driven the CPI housing index to rise above expectations.
Even in normal years, the real estate market in autumn and winter often slows down, and housing prices usually decrease compared to the beginning of the year, as many families are unwilling to move during the school year and homebuyers avoid shopping during the holiday. According to data from the National Association of Real Estate Agents, if the sales of completed homes for the entire year of 2023 ultimately fall below the expected level of less than 4 million units, it would be the first time since 1995 that this integer level has been exceeded.
The contraction of the US real estate market is reflected in a survey conducted by Fannie Mae in September, where only 16% of consumers said it was a good time to buy a house, which is consistent with the historical low since mid-2010. Data from the Mortgage Bankers Association also shows that mortgage applications in the United States dropped to their lowest level since 1995 in late September, indicating that home sales are expected to continue to be sluggish in the coming months. According to data from real estate brokerage website Realtor.com, nearly 18% of the listings launched in September saw a price reduction, the highest proportion since November 2022.