Research Summary
The report discusses the current state of the housing market, comparing it to the conditions before the 2006 crash. It highlights the factors influencing home prices, including supply and demand, credit availability, and affordability. The report also examines the role of mortgage-backed securities and adjustable rate mortgages in the housing market. Despite high interest rates and affordability concerns, the report suggests that home prices are expected to grow slowly due to limited supply and low delinquency rates.
Key Takeaways
Stability of the Current Housing Market
- Comparison to the 2006 Crash: The report suggests that the current housing market is more stable than it was before the 2006 crash, with tighter credit availability and fewer issues that plagued the previous market.
- Role of Supply and Demand: The report emphasizes that supply and demand, as well as the supply and demand for financing, are core drivers of home prices. The current low home inventory may explain why home prices remain resilient despite affordability challenges.
- Impact of Credit Availability: Credit availability played a significant role in the rise of home prices before the last crash, but credit conditions are now generally tight. This has contributed to the stability of the current market.
Factors Influencing Home Prices
- Role of Mortgage-Backed Securities: The report highlights that the share of non-agency mortgage-backed securities issuance rose and fell dramatically before the last crash, reflecting credit availability.
- Impact of Adjustable Rate Mortgages: Adjustable rate mortgages started to adjust higher before the local home price peak in 2006, leading to weaker home prices. Currently, mortgage rates tend to be fixed for 5 years or more in the relatively small non-agency MBS market of ARMs.
- Effect of Delinquency Rates: Delinquency rates and the buildup of ‘shadow’ inventory of homes contributed to excess supply and drove prices to the depths during the housing crisis. However, the report notes that delinquency rates are currently low.
Affordability Concerns
- High Interest Rates: Affordability remains a concern due to high interest rates, but limited supply of homes for sale and lower fixed mortgage rates offset this challenge.
- Debt-to-Income Ratios: Borrowers are stretching on mortgage payment relative to their income, with debt-to-income ratios averaging ~39% for home purchasers.
- Loan-to-Value Ratios: Leverage is relatively low for borrowers taking cash out of their homes, with loan-to-value ratios below 60% for agency mortgage cashouts.
Actionable Insights
- Understanding Market Dynamics: The report suggests that understanding the dynamics of supply and demand, as well as credit availability, can provide insights into the direction of home prices.
- Monitoring Affordability Indicators: Keeping an eye on affordability indicators such as interest rates, debt-to-income ratios, and loan-to-value ratios can help gauge the health of the housing market.
- Considering Market Stability: Despite affordability concerns, the report suggests that the current housing market is more stable than before the 2006 crash, which could influence investment decisions.
