As the Federal Reserve continues to indicate higher US base rates in the short to medium term there have been concerns that the US house prices could go into reverse. At this moment in time there are mixed signals with some suggesting a continued rise while others seem to indicate a slowdown. If we take a step back and look at the US housing market from a distance, there are a number of reasons why house prices will not fall too far in the short to medium term.
At this moment in time there are 200,000 new jobs per month which will have a positive impact upon household incomes and wage inflation. This is something which is set to continue for the foreseeable future and if Donald Trump is good to his word we could see significant growth in the US economy for some time to come. While there are some who have been priced out of the US housing market, the addition of potentially 200,000 new house buyers a month will more than make up for this.
Lack of supply
As we are starting to see in many countries around the world, while some indicators suggest that the housing market is falling back, a lack of supply should keep prices fairly steady. It is difficult to understand why there is such a lack of supply across the world, it may be that potential buyers feel there is further upside or are they concerned about tighter mortgage regulations? Either way, it is highly unlikely we will get a flurry of new stock in the short to medium term so this will offer a degree of support to prices.
Despite the fact that US base rates began to rise back in December 2015, with a further interest rate rise expected towards the end of 2017, this has had relatively little impact upon mortgage rates. We may not be seeing the eye-catching offers of the last 12 months but the core mortgage rates have not moved anywhere near as much as people had expected when base rates started to rise. This can only help homebuyers as household incomes continue to increase giving investors more dollars in their pockets.
Mortgage/rent breakeven rate
One interesting factor which is not really covered in much detail is the equivalent mortgage rate rise required before renting becomes the more sensible option. A number of experts have worked out the national breakeven rate and suggest that mortgage rates would need to rise to around 8% to make the cost of buying property the same as the cost of renting. With rates nowhere near this level this should offer more short to medium term support to the US housing market.
These are just four of a number of factors which should support the US house prices in the short to medium term. The doom and gloom merchants would have you believe that US house prices are hovering on the edge of a precipice when in reality this is not the case. We may see some short-term consolidation, demand may weaken a little but there are still more positive factors supporting the US housing market than there are negative ones dragging it down.