by Jake Katz, Yield Book Mortgage Research
We previously explored the impact of the COVID recession on the US housing market, and how it’s differed from the GFC—primarily in that an anticipated housing crisis never materialized. In fact, not only have we thus far dodged a post-COVID housing crash, but the US housing market appears to be booming—largely driven by low mortgage rates and restricted supply. To gauge how enduring this trend could be, we ran our Yield Book House Price model to project how much of a mortgage rate increase the US housing market boom could withstand.
The COVID housing crisis that never was
A number of factors have prevented a US housing crash from developing during the pandemic crisis, even amid widespread lockdowns and surging unemployment. Fearing a re-run of the GFC housing crisis, the US government took sweeping and unprecedented measures designed to protect the housing sector. Loan forbearance schemes, expanded options for distressed borrowers, and the Fed QE maintaining near-historic low mortgage rates have all contributed to keeping the US housing market afloat during the pandemic.
The impact of these support schemes is evident in recent US mortgage foreclosure data—particularly when compared to the GFC. As shown, foreclosures spiked during the GFC and collapsed during the pandemic crisis.
Of course, the risk of a sharp rebound in mortgage foreclosures remains when forbearance programs ultimately come to an end. But the structure of the mortgage market has changed since the GFC, with improved underwriting standards and a dramatically lower proportion of sub-prime and other non- traditional mortgages. As such, transition rates from mortgage delinquency to full-blown foreclosure have fallen, potentially boding well for the post-forbearance scheme era.
Supply shortages are driving the boom
While it’s clear a housing crisis has thus far been averted, what’s perhaps less clear is why the US housing market is booming. House prices in the US have soared since the onset of the pandemic crisis, skyrocketing past pre-GFC peaks.
In addition to low mortgage rates, supply shortages have been a key driving force behind rising US house prices. Leading up to the COVID shock, restrictions on land use reduced elasticity in housing supply—and the pace of US housing starts has never recovered to reach pre-GFC levels.
Another aspect of this low inventory is that housing supply has not kept pace with population growth. Housing data from the US census is a relatively new measure, so we can only look back seven years from the peak of the boom immediately preceding the GFC. But as shown, new homes for every additional person fell from 0.65 in Q4 2007 to 0.51 in Q4 2019.
These factors have led to a sharp reduction in housing inventory at the national level. According to the National Association of Realtors, total housing inventory had fallen to 1.07 million units at the end of March 2021, down 28% from March 2020, and close to the lowest levels seen since the series began in 1982.
Shock testing the US housing boom
While supply shortages might persist for some time, the other key factor putting upward pressure on US housing prices—low mortgage rates—has the potential to change in the not-so-distant future. As such, we ran our Yield Book MSA level House Price Appreciation Model to test just how much of a rate shock the housing boom could withstand.
For our base case, we project rates trend back to average pre-COVID levels by the end of 2022. In the chart below, we present projections run under two rate shocks: up 100bps and up 200 bps.
As shown, the impact and magnitude of the shock follow the anticipated trajectory, demonstrating a 200bp increase in mortgage rates doesn’t prevent house prices from rising in 2022/23. This underscores the strength of the housing market’s underlying fundamentals—and the significance of the supply shortfall.
 National Association of Realtors housing report, April 2021.
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