US property market in line for correction

US property market in line for correction

As followers of our News section know, the US property market has experienced frenzied activity over the last 18 months. Unprecedented demand has set inventory spiralling downwards and forced median sales prices to their highest ever. A correction could, however, be ahead, although, as Moody’s Analytics points out, not a crash. 

Burgeoning prices 

Median prices in the US property market have risen steadily and regularly reach historic highs every month. The latest increase (June) is no exception. The 13.4% year-on-year rise brought the median sale price to US$416,000. 

This figure set yet another record despite the drop in sales. According to statistics from the National Association of Realtors, transactions dropped by 5.4% in June compared to May. 

Correction on the cards 

In tandem with rising prices, the property market is also experiencing steady interest rate rises. After the latest increases, the average mortgage rate for a 30-year fixed-rate loan now stands at around 6%. This translates to considerably higher monthly repayments and a loss of affordability as a result. 

This situation leads analysts such as Mark Zandi from Moody’s Analytics to predict a correction in the near future. He believes that the size of the correction will depend on mortgage interest rates. If they stay at around their current 6%, Zandi believes house prices will adjust accordingly. If, on the other hand, they rise further, he predicts a “significant pullback in the housing market”. 

Time not ripe for first-time buyers

Millennials and first-time buyers have been facing considerable challenges to enter the US property market. These latest mortgage interest rises have complicated their situation still further. As a result, the Chairman of the Fed, Jerome Powell, recommended that they do not invest in housing at the moment. 

He pointed out that it continues to be “a tight market” and that supply and demand need to return to a balance. “If you’re a homebuyer or a young person looking to buy a home, you need a bit of a reset,” he said in mid-June. 

The latest rises in mortgage rates aim to slow down housing prices. “Housing is the most rate-sensitive sector of the economy,” said Zandi, adding that prices are likely to be first to feel the effects of inflation. 

Correction but not a crash

Although Zandi predicts a housing price correction, he does not believe that the US property market is in line for a crash. His reasoning lies in the strength of the build-to-rent trend, currently a booming niche in the real estate sector. 

Zandi believes that the build-to-rent trend is “here to stay, even with higher mortgage rates”. Institutional investment in this type of property is long-term, therefore “creating stability in the market”. 

“I think this is a business model that works,” Zandi told CNBC. “I don’t think the institutions are going to sell.”

(Source: CNBC)