Email of the day on US real estate
Comment of the Day

November 16 2018

Commentary by Eoin Treacy

Email of the day on US real estate

I have noticed that you had not shared any insight into the US real estate sector. Will you mind sharing into this sector from the macro angle and the stocks outlook

Eoin Treacy's view

Thank you for this suggestion which other subscribers may have an interest in. Real estate is a major asset class which has been the subject of price appreciation as a result of quantitative easing just like bonds, equities and art. However, property’s immovable qualities will always mean location and local supply will be essential features to valuations.

The fact mortgage rates have broken out on the upside is both reducing refinancing demand and highlighting the rising expense of buying a home. That is particularly true for consumers in high price and high state income tax jurisdictions like California, New York and New Jersey since they will lose their ability to deduct expenses for the 2018 tax year.   

The last time mortgage rates where at this level, house prices were lower and affordability was therefore much more attractive than it is now. In fact, the currently level of affordability is equivalent to prices in 2003 when mortgage rates were 1% higher.

While there will be of course be variation in prices based on location that comparison should give the bulls on price appreciation something to pause about. That also highlights how important the actions of the Fed in continuing to raise rates are and suggests they may be close to peak for this cycle.

The S&P500 Homebuilders Index has paused following an accelerated decline in October. While there is certainly scope for a reversionary rally, a sustained move back above the trend mean would be required to question the medium-term supply dominated environment.

The root problem that contributed to the US housing bubble was reckless lending standards. That is not present today and consumers are far less leveraged now than then. That suggests a crash is not imminent but neither does it mean prices need to keep appreciating.

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