US Housing Will Not Cause The Next Recession

Our recent US research trip highlighted the tailwind to wealth and consumption from house prices. In discussions across the seven states we visited (California, Arizona, Illinois, Washington, New York, Florida, Washington DC), wealth gains from housing, particularly in the low and mid segments of the market, was a topic of focus and contentment. This is supported by the hard data with cities across the US recording large price rises, albeit from unsustainably low levels, since the GFC.  

Looking ahead, we expect US house prices to generally push higher supported by low interest rates and continued full employment. The major gateway cities (including New York, Boston, Chicago, Washington DC, San Francisco and Los Angeles) are increasingly viewed on the ground and as well as statistically as being “overpriced”. With that said, there are a number of components supporting current levels and likely to take prices higher. These include:

• the cost of money is very low and affordability is so good;
• related to this, the US mortgage market is fixed rate so its sensitivity to higher interest rates is muted
• mortgage debt is up only 9% since the pre-GFC peak. (By contrast, corporate debt has risen in excess of 100%);
• property lending has been generally conservative this cycle;

· and leading indicators such as building permits are robust.

For the US economy, housing will help prolong the current economic cycle by further strengthening household balance sheets. Housing in our view will not cause the next US recession. It is though worth noting the real estate market will be impacted when the next recession hits, albeit in varying degrees by city/state and market segment.

There are problem pockets, though. Ultra-expensive new apartments in New York are struggling to sell as overseas buyers opt out of the market. Other gateway cities have similar stories in this ultra high end, albeit to lesser degrees.

The major ticking time bomb is in Miami. Firsthand it was obvious that the top end condominium market is on the cusp of a significant collapse, as a large number of new luxury towers have been built with no buyers. According to Zillow, a US online real estate database company, the listed price for a condominium over US$5m has already declined more than 20% over the past year. Talking to local experts, price falls of more than 50% are expected in the short to medium term in the top housing end, with knock-on effects into the high/middle market segment.

The reasons for this include: overbuilding and ongoing sinking/king tides and hurricanes, and the lack of wealthy foreign buyers (Chinese, Russian, Saudi Arabia, South Americans). The latter is being further fuelled by wealthy South Americans selling existing condominiums as price losses more than offset their currency gains, as they struggle with their own country woes. As the following chart shows, Brazil, Argentina, Chile and Venezuela are collectively in a nasty recession and in the recent past we have not seen these four countries with such severe economic problems at the same time.

Is this a warning sign for the wider US property market? Historically this has been the case: Miami weakens, and the rest of the US housing markets follows with a 1-2 month lag. This cycle we think Miami is a case unto itself as the US housing market fundamentals remain intact, and we are not seeing Miami as a leading indicator of the broader economy. In a year or two there should be some good bargains in the Miami condominium markets but buyer beware: for now, this is a segment to avoid!