Condition of the real estate market in the US, and how the interest rates hike has affected it.
The most useful feature of the real estate market is that it is an excellent thermometer of the country's economy. It anticipates what is going to happen, so when the market in question is the US market, which represents 25% of the world's economy, it is only a matter of time before it spreads to Europe.
In 2008, the American real estate market had already experienced a very large bubble in terms of volume, compared to that, there is now a totally different picture that makes the two events not at all comparable.
The first bubble was also called the subprime bubble, a name used to identify mortgages that were not of prime creditworthiness. At the time, a large majority of Americans took on debt to purchase one or more multifamily real estate given the ease of access to credit, until loans became increasingly difficult to obtain and the ability to repay became increasingly inefficient, and thus, in a cascade, as mortgages "exploded", the economy plunged into a state of recession.
The damage generated by this chain of events was made up for in numbers just two years ago, in 2020, with a remarkable 13% year-over-year growth in real estate values, well above the 20-year average of 2% and even the 10-year average of about 5%.
In this regard, in 2021, the National Shiller Price Index (percentage change in the real estate market) recorded an increase in real estate values that reached a low of $50,000.
Leaving aside Florida, which, due to its very affordable taxation, may have boosted the data, the rest of the U.S. real estate market has grown by leaps and bounds over the past three years, despite a pandemic, the war in Ukraine that affected everyone due to resources, and a bear market (which has been treading water for over a year now).
It wasn't uncommon to see lines at open houses in the U.S. last year to buy homes of all sizes and price points, but now things have definitely changed. American families have fewer and fewer resources to spend, and those who don't have an imminent need are either forgoing buying multifamily real estate or finding homes of convenience.
This has a couple of effects: on the one hand, there are fewer people who can and will buy a multifamily real estate, perhaps despite the state of need, hence the drastic drop in mortgage applications, and on the other hand, the entire industry suffers, more precarious jobs, less demand for kitchens and living rooms, fewer electricians, carpenters, and moving jobs, and thus the U.S. economy suffers a sharp contraction.
Data analysis and the health of the real estate market US
The demand for home loans, both primary and secondary, is at its lowest level in 22 years, despite the fact that the market is moving very slowly.
The real estate market strongly anticipates the coming crisis but it is also very slow, it does not have the same reaction time as the stock market which is often abrupt, first the price of houses stalls, then the buyers disappear and finally the price corrects (this year -8%) with all that follows.
The monthly payment/income ratio is the most important, and Americans are used to thinking in terms of affordability of the monthly payment. For the same payment, a U.S. citizen today can afford a multifamily real estate worth $118,000 less than in 2020, if we're talking about $500,000 homes. We are at a point where interest rates, which are closely tied to the monthly payment, are 6%, but it is not clear that they can go back up and the gap will widen.
That 6 percent rate is strongly tied to the U.S. Central Bank's interest rate increase and they are at that level with an overall increase of 225 basis points, but the Federal Reserve has already stated not only that there will be at least one more rate increase this year but that increases will continue next year until inflation reaches about 3 percent.
The more rates rise, the more expensive mortgages become, compared to earlier this year when U.S. mortgages were at 3 percent. Today, after three quarters, they are at 6.25% and the growth shows no signs of stopping.
A very interesting fact in this spiral of difficult access to credit and falling real estate prices is the percentage of searches for the phrase "how to sell my house now" on Google, which recorded an extraordinary +2750% in August alone this year.
Going into detail, we can see that the most affected price range will be homes between $500,000 and $800,000 and homes under $200,000, although for now, those in the latter range have enjoyed a significant parachute, such as the fact that buying a home has a strong emotional component and therefore buyers are willing to endure increases in order to realize the dream of buying a multifamily real estate, but it is unclear how long this "patience" will last in the face of continued increases.
The monthly supply of new homes, which is the ratio of newly built homes for sale to unsold homes, is down sharply, indicating that unsold properties are becoming more prevalent.
