I tell you the real reason the American market is booming…
Why is the US property market booming?
Ok, booming might be a bit of a stretch. But it’s definitely looking strong. Bank of America recently said it’s a “shining star in the economic recovery.”
That shininess is surprising. The US has had and is having one of the worst experiences with Covid, and it’s only in the last couple of week that it seems to have gotten on top of its new case count:
But, the US has also had one of the heftiest policy responses. The US Fed and the Treasury have thrown an absolute crap-can of money at the economy, interest rates hit the floor, and so far things are holding up.
And there are strong signs out of the property market.
New home sales collapsed in May, but then bounced right back in June, up a thumping 55%.
US homeownership has also spiked to the highest level on record. It topped out at 67.9% in the April–June quarter. Up from 65.3% in the first quarter, and 64.1% a year ago.
The rental vacancy rate has fallen, now down to 5.7%, the lowest level since 1984.
On the back of a tighter market and increasing sales, homebuilder confidence is surging.
The S&P Homebuilders Select Industry Index (that plummeted almost 50% when COVID hit in March) has now more than doubled. It’s trading at record highs for the first time in 15 years.
Like Australia, record low interest rates have sparked a run on mortgage refinancing. The number of Americans looking to refinance their mortgages jumped 111%.
And Quicken Loans — the US’ largest mortgage lender — just had its best quarter in its 35-year history.
Put it altogether, and median house prices actually jumped 4.1% in the June quarter.
So, so shiny.
So what’s going on here?
Well, it’s true that so far government spending has done a good job of underpinning the economy, so households have held up better than expected.
Mortgage interest rates have also fallen to record lows, and most buyers are looking through the short-term impacts of the shock to how cheap a 30-year mortgage actually is at those rates.
There’s also a distributional element here. Where Covid has had a big impact on the economy and the labour market, that tends to be in lower-income sectors of the economy.
So if you look at what households have seen a fall in income since the beginning of the Covid story, you can see that lower income earners have been hit hardest.
This chart shows that close to 60% of householders earning less than $35,000 a year have seen a fall in their incomes, versus just 40% of those earning over $75,000 annually.
And we know that when we’re talking about housing demand, then we’re talking about middle or high-income earners.
The American National Association of Realtors pegs the median income for new home buyers at $93,000 a year.
So Covid hasn’t had such a big impact on the households that were likely to be purchasing property. So demand has held up.
It is also the case that running through the short-term noise of the Covid shock is the 18-year credit cycle – a cycle that seems to run like clockwork in the US (and to a slightly lesser extent, here).
The credit cycle underpins a real-estate cycle – and it’s a cycle that says while we were due for a mid-cycle slow down around about now, we’re still very clearly in the upswing phase.
And I think to a large extent it’s this momentum that is carrying the American property market through the crisis…
… and will carry it surging out the other side.
Shiny will only get shinier.
Now as I said, the same dynamics, more or less, are playing out here in Australia as well.
So far, the impact on the property market here has been muted.
But on the other side of the crisis, especially with all the cheap money gushing into the system right now, you can expect the Australian property market to come surging out of the gates as well.
For now, America shows the way.