The housing market in the U.S. remains healthy overall but tepid, buoyed by an economy with, currently, low unemployment, tame inflation and low interest rates, according to an analysis by Hedged Equity.
Still, home ownership is at its lowest in 50 years, housing affordability has been contracting in the past 5 years (see chart), more consumers are renting versus buying, and more homes in the U.S. are increasingly being purchased by foreign buyers.
Key Trend Takeaways
Geopolitical and global macroeconomic uncertainties have been the drivers of US real estate purchases by foreigners.
Uncertainty over the incoming Trump administration has driven up mortgage rates, which rose above 4% for the first time since 2015.
US commercial real estate has become a safer bet for foreign yield-seeking investors due to negative interest rate policies in the EU and Japan.
While loans to commercial real estate remain healthy, deals and transactions are declining.
Price appreciation in US residential real estate markets have risen (see chart) but remain tempered by restrained supply versus demand.
U.S. Outlook
“Of foremost importance to the real estate market in 2017 will be 1) a more restrictive interest rate policy outlook and its consequences on residential mortgage rates 2) the U.S. economic outlook and 3) a potential pickup in inflation on the activity of real estate investor decisions.
There are emerging signs of frothiness in major urban centers including New York, San Francisco and Miami. Prices in Manhattan for the higher-bracket market, namely properties above the $1 million threshold, fell 8.7% year over year in Q4 2016 and 2.2% quarter over quarter. Foreign buyers, especially active in luxury residential properties, are now feeling the pressure of a strong dollar on their willingness to purchase.
What will be important in 2017 is the continued strong showing of the US economy and relative attractiveness of yields. This is of special importance as 37% of all homes sold in the U.S. last year were purchased for investment purposes.
The homeownership rate in 2016 was the lowest in 50 years, as renting has been increasingly the more frequent choice compared to purchasing. Were interest rates or inflation surprise to the upside in 2017, the negative price movements of the last months are likely to not only persist, but become more significant.”
Real Estate Markets Outside U.S.
As a way of benchmarking, an HSBC study of more than 9,000 people in nine countries finds that 40% of Millennials currently own their own home – U.S. underindexed at 35%.
Housing affordability remains persistently an issue for Millennials. 34% are being held back because they cannot afford the types of property they like, compounded by growth in house prices that are, in countries like the U.S. and Australia, more than twice the growth in real wages.
Sources: Seeking Alpha, Hedged Equity, The Economist, National Association of Realtors
