The U.S. housing market, from shortage to surplus?
2024-08-19
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(The author of this article is Zhao Wei, Chief Economist of Shenwan Hongyuan Securities)
Recently, the US real estate sales data has weakened significantly. Is it a short-term adjustment or a turning point? Based on the supply and demand analysis of new and existing homes, this article believes that the main contradiction in the US housing market may have shifted from supply shortage to oversupply, and demand has become the "short board".
Hot Topics: The U.S. real estate market, from shortage to surplus?
1. Demand: Falling interest rates may boost sales, but attention should be paid to marginal changes in the labor market
In the long run, the fluctuation of US Treasury bond interest rates is closely related to real estate sales. From January to April this year, the rise of 10-year US Treasury bond interest rates suppressed US real estate sales, but the interest rate has fallen by nearly 100BP in the past few months, which may boost the subsequent real estate sales growth accordingly. Assuming that the 10-year US Treasury bond interest rate remains at 4.0% in the second half of the year, the guidance for the growth rate of US new home sales and existing home sales will improve upward.
It is not just the short-term interest rate fluctuations that affect US real estate sales. The long-term population structure and employment market conditions will also affect US real estate demand. The former has not fluctuated much in the short term, while the latter has clearly shown a weakening trend since the second half of this year, especially with the unemployment rate rising to 4.3%. If the US job market stalls and weakens in the future, this factor may have an impact on US real estate sales demand.
2. Supply: New housing supply tends to be in excess, and the gap in existing housing supply has eased
Since 2023, the situation that the sales of existing homes in the United States have been significantly weaker than those of new homes, and the sharp rise in US house prices are largely determined by the tight supply of existing homes. The current number of months for existing homes available for sale in the United States has recovered to 4.1 months, basically returning to the level before the epidemic. The momentum for house price increases caused by the imbalance between supply and demand in the US existing home market in the early stage is fading. The subsequent trend of US house prices will depend more on whether the decline in interest rates can stimulate real estate demand and the slope of the improvement in the willingness to sell existing homes.
The sufficient supply of new homes in the United States mainly benefits from the recovery of the new home construction chain in the early stage, but the weakening of US real estate sales in the first half of the year may have an impact on US real estate investment in the second half of the year. Taking the single-family new home chain as an example, the main transmission chain of the US single-family new home construction chain is: new home sales - construction permits - new home starts - new home completions.
3. Macroeconomic Implications of the U.S. Real Estate Market: U.S. Inflation and Chinese Exports
The weakening of U.S. real estate sales in the first half of this year is likely to drag down U.S. residents' real estate-related durable goods consumption with a lag, and will also have an impact on my country's post-real estate cycle-related export commodities to the U.S. The transmission lag is about 6 months. The trend of my country's post-real estate cycle-related exports to the U.S. in 2025 will depend on the subsequent downward trend in U.S. interest rates and the effect of the Fed's interest rate cut on real estate sales.
In the short term, the rise in house prices since 2023 may still push up rental inflation in 24Q4, complicating the Fed's decision to cut interest rates at the end of the year. The driving logic of US house prices may change in the future, which will affect CPI housing inflation about a year and a half later. If the rise in house prices pauses in the future, US rental inflation will ease at the end of next year, which will be conducive to the Fed's increase in interest rate cuts next year.
Risk Warning
Geopolitical conflicts escalate; the Federal Reserve turns hawkish again; financial conditions shrink at an accelerated pace.
This article only reflects the author’s views.
