The Resilience of the US Housing Market

It has been 16 years since the subprime mortgage bubble popped and the U.S. housing market crashed. Now, concerns are rising about the possibility of another housing bubble, particularly with higher interest rates impacting sale activity following a 20% surge in home prices during the pandemic.

However, according to Goldman Sachs, the chances of another major crisis in the estimated $44.5 trillion U.S. housing market are slim. This optimism stems from the fact that most homeowners took advantage of ultra-low pandemic rates and refinanced their mortgages before the 30-year fixed rate surpassed 7%. As a result, many families have been shielded from the impact of higher rates in 2023. This situation contrasts with the period 15 years ago when the Federal Reserve raised rates, and the use of “affordability” products such as adjustable-rate mortgages backfired.

A key factor contributing to this overall stability is the virtual absence of low or no financial documentation mortgages in recent years. Additionally, the share of homes financed in the private market, which operates outside the government’s stricter post-crisis lending standards, has remained relatively low despite the significant increase in home prices since 2020.

While it’s possible that housing prices may face challenges in gaining momentum, the evidence points to a resilient housing market that is better positioned to weather potential risks.

The Mortgage Market Outlook

According to credit research by Lotfi Karoui’s team at Goldman, the mortgage market is currently seeing a significant number of loans with fully-documented borrowers. While this is generally positive, there are concerns among investors and policy makers regarding the rapid appreciation of home prices.

One worry is that this resilience in the housing market may necessitate even higher policy rates from the Federal Reserve. However, Karoui’s team believes that a strong labor market, a low borrower delinquency rate, and a limited supply of homes due to years of underbuilding will contribute to modest home price growth in 2023 and 2024, unless any negative shocks affect the broader economy.

In recent weeks, investors have been closely monitoring the sharp rise in long-term rates that finance the economy. The 10-year Treasury yield has reached a 16-year high, while the 30-year Treasury rate briefly exceeded 5%.

On Wednesday, stock markets were mostly down ahead of the release of Federal Reserve minutes from a September policy meeting. During this meeting, the policy rate was maintained at its highest level in 22 years, ranging from 5.25% to 5.5%.

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