U.S. housing market gradually cooling

Lalaine C. Delmendo | March 04, 2019

After six years of strong house price growth, the U.S. housing market is now cooling. House price rises are decelerating gradually. Demand and construction activity are falling, amidst rising interest rates. Homebuilder sentiment is also at its lowest in more than three years.

US house prices

The S&P/Case-Shiller seasonally-adjusted national home price index rose by 5.16% during the year to November 2018 (2.92% inflation-adjusted), a deceleration from the previous year’s 6.09% growth and the lowest pace in more than two years. This was supported by Federal Housing Finance Agency’s seasonally-adjusted purchase-only U.S. house price index, which rose by 5.76% y-o-y in November 2018 (3.5% inflation-adjusted), lower than the y-o-y rises of 6.72% in November 2017 and 6.37% in November 2016.

Despite this, all 20 major U.S. cities continued to experience house price hikes, according to Standard and Poor’s, with Las Vegas posting the highest increase of 12.07% during the year to November 2018, followed by Phoenix (8.1%), Seattle (6.33%), Denver (6.22%), Atlanta (6.2%), Minneapolis (5.77%), Detroit (5.75%), Tampa (5.68%), San Francisco (5.6%), Boston (5.59%), and Charlotte (5.45%). Modest house price rises were registered in Miami (4.96%), Cleveland (4.63%), Los Angeles (4.44%), Portland (4.38%), Dallas (3.96%), New York (3.5%), San Diego (3.35%), Chicago (3.11%) and Washington (2.72%).

The Mountain region had the highest house price increases of 7.44% y-o-y in November 2018, followed by the East South Central (7.32%), South Atlantic (6.68%), East North Central (5.73%), West North Central (5.59%), and New England (5.29%), according to the FHFA.

The average sales price of new homes sold in the U.S. rose by just 1.8% y-o-y in November 2018, to US$362,400, according to the U.S. Census Bureau. In fact, the median sales price of new homes sold fell by 11.9% to US$302,400 over the same period.

For existing homes, the median price was up by a modest 2.9% to US$253,600 in December 2018 from a year earlier, according to the National Association of Realtors (NAR). December’s price increase marks the 82nd consecutive month of year-over-year gains.

Demand is now falling

Sales of new single-family houses were down 7.7% to a seasonally-adjusted annual rate of 657,000 units in November 2018 from the previous year, according to the US Census Bureau. Likewise, existing home sales fell by 10.3% y-o-y to 4.99 million units in 2018, according to NAR.

Construction activity is weaker. In November 2018, new housing starts fell by 3.6% y-o-y to a seasonally-adjusted annual rate of 1,256,000 units, while completions were down 3.9% to 1,099,000 units, according to the U.S. Census Bureau. Building permits authorized for new housing units rose by a meagre 0.4% y-o-y to 1,328,000 units in November 2018.

U.S. homebuilder sentiment declined to just 54 in December 2018, well below the previous year’s level of 74 and actually the lowest reading since May 2015, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). A reading of 50 is the midpoint between positive and negative sentiment.

“This housing slowdown is an early indicator of economic softening, and it is important that builders manage supply-side costs to keep home prices competitive for buyers at different price points,” said NAHB Chief Economist Robert Dietz.

The U.S. housing market is expected to continue to slow in the coming years. NAR projects only about 1% increase in existing home sales this year to 5.4 million units. In addition, the national median existing-home price is forecast to rise by a modest 3.1% to around US$266,800.

“The forecast for home sales will be very boring – meaning stable,” said NAR’s chief economist Lawrence Yun. “Home price appreciation will slow down – the days of easy price gains are coming to an end – but prices will continue to rise.”

US Economic growth is very strong, and corporate taxes have been cut

The U.S. economy grew by 3% in 2018 from a year earlier, up from an expansion of 2.2% in 2017 and actually the fastest pace since 2005, according to the U.S. Federal Reserve. The economic growth was mainly fuelled by strong consumer spending, which is supported by rising household wealth, higher house prices, tax cuts, and wage growth.

However the economy is expected to slow, with projected GDP growth rates of 2.3% this year, 2% in 2020 and 1.8% in 2021, mainly due to the ongoing trade war, according to the Fed.

President Donald Trump recently signed a landmark tax law (known as the Tax Cuts and Jobs Act or TCJA), the largest overhaul of the U.S. tax code in over 30 years. Effective January 1, 2018, the law includes a massive reduction of the corporate tax rate from 35% to 21%, to boost economic growth and stimulate business investment. But it also reduces the mortgage interest deduction cap, increases standard deductions, but restricts state and local tax deductions - with uncertain effects on the housing market.

The story of the U.S. housing boom and bust

All 20 main U.S. cities experienced spectacular house price rises during the boom (1996-Q1 2006). Los Angeles had the biggest house price rise, at 265.5%, followed by San Diego (247.7%), San Francisco (226.6%), and Miami (213.1%).

US new houses sold

Then in Q2 2006, house prices started to fall. The S&P/Case-Shiller composite-20 home price index plunged 33.8% from Q2 2006 to Q4 2011. Phoenix registered the biggest drop (-55.2%) among the twenty largest metro areas, followed by Miami (-50.5%), Detroit (-42.8%), San Francisco (-41%), Los Angeles (-40.7%), and San Diego (-39.7%).

The U.S. housing market started to recover in the second half of 2012. All 20 largest cities in the U.S., except New York, saw house price rises in 2012 from a year earlier.

In 2013, the S&P/Case-Shiller composite-20 home price index soared 13.5% from a year. House prices continue to rise in the following years, albeit at a much slower pace. The S&P/Case-Shiller composite-20 home price index rose by 4.4% in 2014, by 5.5% in 2015, by 5.4% in 2016, and by 6.3% in 2017.


US Cities Housing boom (Jan 1996 – Mar 2006) Housing crash, global crisis (Apr 2006 – Dec 2011) Housing recovery, boom (Jan 2012 – Dec 2017) Nov 2018 (y-o-y)
New York 172.58 -24.45 21.09 3.50
Los Angeles 265.49 -40.06 68.09 4.44
Chicago 96.84 -33.47 27.37 3.11
Phoenix 182.59 -54.73 67.95 8.10
San Diego 247.66 -39.68 64.73 3.35
Dallas - -7.53 58.91 3.96
San Francisco 226.59 -40.82 98.21 5.60
Detroit 71.99 -43.31 66.69 5.75
Boston 152.49 -16.38 37.78 5.59
Seattle 134.22 -23.97 77.77 6.33
Composite-10 192.25 -33.52 46.55 4.29
Composite-20 - -33.31 50.12 4.68
Sources: S&P, Global Property Guide

Home sales falling, amidst higher interest rates

Existing home sales (which include single-family homes, townhomes, condominiums and coops) stood at 4.99 million units in 2018, down by 10.3% from a year earlier, according to the National Association of Realtors (NAR).

  • In the Northeast, existing home sales fell by 6.8% in 2018 from a year earlier, at 690,000 units.
  • In the Midwest, existing home sales fell by 10.5% in 2018 from a year earlier, at 1.19 million units.
  • In the South, existing home sales dropped 8.7% to 2.09 million units in 2018 from a year earlier.
  • In the West, existing home sales plunged 15% y-o-y to 1.02 million units in 2018.

NAR’s chief economist Lawrence Yun claims that the lower demand was mainly due to higher interest rates. “The housing market is obviously very sensitive to mortgage rates. Softer sales in December reflected consumer search processes and contract signing activity in previous months when mortgages rates were higher than today.”

Likewise, new homes sold fell by 7.7% y-o-y to a seasonally-adjusted annual rate of 657,000 units in November 2018, according to the US Census Bureau.

First-time homebuyers accounted for about 32% of total sales in 2018, unchanged from a year ago, according to NAR. In addition, all-cash sales were 22% of all transactions in 2018, up from 20% in 2017. Individual investors, who account for many cash sales, purchased 13% of homes in 2018, down from 16% a year ago.

Residential properties typically stayed on the market for 46 days in December 2018, up from 40 days in December 2017, but down from 52 days in December 2016 and 58 days in December 2015.

Residential construction remains weak

Residential construction activity remains weak, and still far below peak levels.

In November 2018 (at seasonally adjusted annual rate):

  • Housing starts: 1,256,000 units, down 3.6% from a year earlier
  • Housing completions: 1,099,000 units, down 3.9% from a year earlier
  • Housing permits: 1,328,000 units, up slightly by 0.4% from a year earlier

US residential construction

From 1990 to 2007, housing completions averaged 1.5 million units per year, peaking at almost 2,000,000 completions in 2006, but crashed to 584,900 units in 2011. Residential construction started to recover in 2012, and by 2017 was back at 1,152,300 units. However, this is still far below the peak of 2005/6.

The total number of existing homes available for sale rose by 6.2% y-o-y to 1.46 million units in December 2018, according to NAR. Existing homes inventory was at 3.7 months supply, up from 3.2 months a year ago. On the other hand, the seasonally-adjusted inventory of new houses for sale at the end of November 2018 was 330,000 - equivalent to about 6 months of supply, up from just 4.6 months of supply a year earlier, according to the U.S. Census Bureau.

Foreclosures continue to fall

Foreclosure filings, which include default notices, scheduled auctions, and bank repossessions, were down by 8% from a year earlier at 624,753, and down by 78% from the peak of nearly 2.9 million properties in 2010, according to ATTOM Data Solutions.

US deliquency rate

The foreclosure rate was 0.47% of all housing units in the U.S. in 2018, down from 0.51% in 2017, 0.7% in 2016 and from the peak of 2.23% in 2010. New Jersey had the highest foreclosure rate in the country in 2018, at 1.33% of all housing units with a foreclosure filing, followed by Delaware (0.96%), Maryland (0.86%), Illinois (0.74%), and Connecticut (0.72%).

“Plummeting foreclosure completions combined with consistently falling foreclosure timelines in 2018 provide evidence that most of the distress from the last housing crisis has now been cleaned up,” said Todd Teta of ATTOM Data Solutions.

Interest rates rising

The Fed Funds target rate was raised to 0.25%-0.50% in December 2015 and further to 0.50%-0.75% in December 2016, after being held at 0%-0.25% for seven years.

US interest rates

As a result, mortgage interest rates also rising.

  • The average interest rate for 30-year fixed rate mortgages (FRMs) was 4.46% in January 2019, up from 4.03% in January 2018.
  • The average rate for 15-year FRMs was 3.91% in January 2019, up from 3.48% a year earlier.
  • The average rate for 5-year adjustable rate mortgages (ARMs) rose to 3.91% in January 2019 from 3.47% a year earlier.

Despite this, mortgage debt outstanding continues to rise by 3.8% y-o-y to US$15.27 trillion in Q3 2018 from a year earlier, according to the U.S. Federal Reserve System. One- to four-family residences accounted for about 70.8% of the total amount of mortgage loans outstanding in Q3 2018.

US outstanding mortgage debt

The size of the mortgage market was equivalent to more than 74% of GDP in 2018, down from more than 76% in the past three years, and far lower than the 100.1% of GDP in 2009, based on Global Property Guide estimates.

Rents continue to increase strongly

Rising rents are another sign of the increasingly healthy U.S. economy. The median asking rent in the U.S. rose strongly by 10% y-o-y to US$1,003 per month in Q3 2018, according to the U.S. Census Bureau.

US median asking rent
  • In the West, the median asking rent surged by 16.8% y-o-y to US$1,382 per month in Q3 2018.
  • In the Northeast, the median asking rent rose by 8.2% in Q3 2018 from a year earlier, to US$1,210 per month.
  • In the South, the median asking rent rose by 8.7% y-o-y to US$973 per month in Q3 2018.
  • In the Midwest, the median asking rent rose modestly by 3.7% y-o-y to US$751 per month in Q3 2018.

Median rents were more or less static from 2008 to 2014, according to the U.S. Census Bureau. However since 2015, rents have risen at least as fast as house prices.

US rental vacancy

The nationwide rental vacancy rate was 7.1% in Q3 2018, down from 7.5% a year earlier, according to the U.S. Census Bureau.

US house price rents

The West had the lowest rental vacancy rate of 5.1% in Q3 2018, followed by the Northeast (6%), and the Midwest (7.6%). The South had the highest rental vacancy rate of 8.7% over the same period.

Homeownership rate increasing gradually

After almost a decade of decline, homeownership has increased in the past two years, despite the continued rise in property prices and tight credit standards. Homeownership in the U.S. stood at 64.4% of households in Q3 2018, up from 63.9% in 2017, 63.4% in 2016, and 63.7% in 2015 – but still below the peak level of 69% in 2004, according to the U.S. Census Bureau.

US home ownership rate

By region:

  • In the Northeast, the homeownership rate was 61.5% in Q3 2018, up from 60.4% a year earlier but down from 65% in 2004.
  • In the West, homeownership rate improved to 60.2% in Q3 2018, from 58.9% a year earlier. But it was still below its peak of 64.2%.
  • In the South, the homeownership rate stood at 65.4% in Q3 2018, down slightly from 65.5% in the previous year and still far below its peak of 70.9% in 2004.
  • In the Midwest, the homeownership rate was 69% in Q3 2018, down slightly from 69.1% a year earlier and still far from 73.8% in 2004.

The new tax law and the housing market

The Tax Cuts and Jobs Act went into effect on January 1, 2018 and its effect to the housing market remains uncertain because of these three key policy changes:

  • Mortgage interest deduction cap will decrease. The new law caps the deduction threshold, which helps homeowners lower their taxable income, on new homes at the first US$750,000 of a loan from the original US$1 million.
  • Standard deduction will increase. The new law raises the standard deduction for all taxpayers to US$12,000 for single filers and to US$24,000 for joint filers. This implies that it may no longer be better for some households to itemize the mortgage interest deduction since it would be lower than their standard deduction.
  • The state and local tax (SALT) deduction will be restricted. The new law caps the SALT deduction at US$10,000 of property value, individual income, and sales taxes. This will have the greatest impact on high-income households since about 93% of households earning US$200,000 to US$300,000 annually claim the SALT deduction, compared with only 39% of households earning US$50,000 to US$75,000.

"While more disposable income for buyers is positive for housing, the loss of tax benefits for owners could lead to fewer sales and impact prices negatively over time with the largest impact on markets with higher prices and incomes," said Danielle Hale of Realtor.com.

US unemployment

In 2018, homes sales fell sharply from a year earlier but it is difficult to attribute this decline to the new tax law.

Some economists also expressed concerns that the new tax law will only hurt the housing market in the long run. At one extreme, the National Association of Home Builders warned of a possible housing recession.

"You’re talking about potentially causing housing recessions in some of the biggest markets in the country, and those kinds of recessions tend to have spillovers," said Jerry Howard of the National Association of Home Builders. "We’re worried about a national housing recession."

This concern was supported by the National Association of Realtors: "Eliminating or nullifying the tax incentives for homeownership puts home values and middle-class homeowners at risk, and from a cursory examination this legislation appears to do just that," said William Brown of NAR.

Labor market is fundamentally strong, despite temporary government shutdown

US federal government shutdown from December 22, 2018 to January 25, 2019 – the longest US government shutdown in history, according to the Bureau of Labor Statistics (BLS). Though it is still lower than last year’s 4.1% jobless rate and the recent peak of 9.6% in 2010.

The labour market remains fundamentally strong, with the jobless rate projected to fall again in the coming months. The IMF expects the US unemployment rate to fall to 3.5% this year and to 3.4% in 2020.

The economy added a whopping 304,000 jobs in January 2019, after adding about 2.4 million jobs in 2018 – the strongest pace for hiring in three years.

The average hourly earnings increased by 3.2% to US$27.56 in January 2019 from a year earlier, slightly down from a 3.3% rise in December 2018, according to the BLS.

US economy to slow, deficit continue to rise

The economy is expected to slow in the coming years, with projected GDP growth rates of 2.3% this year, 2% in 2020 and 1.8% in 2021, according to the Fed, as the stimulative effects of the tax cuts wane and the federal budget deficit surges, exacerbated by the country’s ongoing trade war with China.

US gdp inflation

The federal government ran a deficit of about US$779 billion in 2018, up from the previous year’s US$665 billion and the highest level since 2012. As a result, the budget deficit widened to 3.9% of GDP in 2018, up from 3.5% in 2017, 3.2% in 2016 and 2.5% of GDP in 2015. Despite this, the deficit remains far lower than the deficit of 10.1% of GDP recorded in 2009.

The federal budget deficit is projected to increase further this year to US$900 billion and to exceed US$1 trillion beginning in 2022, according to the Congressional Budget Office.

National debt reached almost US$22 trillion in 2018, up from US$20.2 trillion in the previous year, according to the U.S. Treasury. Debt held by the public was US$16.1 trillion and intragovernmental holdings were US$5.87 trillion.

Overall, inflation was estimated at 2.4% last year, the highest level since 2011, according to the IMF.


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