The US housing market has boomed over the past year as pandemic dynamics have pushed national home prices up nearly 17% year over year, and up more than 20% in many large metro areas. The average number of days on the market is down to a record low of 25 and homes available for sale is down to less than 3 per one thousand people. The market is certainly hot, but we do not think it is at risk of overheating, as short- and long-term fundamentals are still supportive. As such, we do not expect a bust to follow this recent boom for three main reasons.
US household balance sheets have been resilient over the last decade and through the COVID-19 crisis. Household leverage and debt service are at record lows (13% liabilities to net worth and 8.2% debt service ratio in Q1 2021), reflecting both a reduced level of debt and low interest rates. Mortgage origination data shows a healthier picture of the housing market as well, with new mortgage median FICO scores at a record 786 in Q2 2021. Mortgage characteristics are of much higher quality today as well, with minimal floating rate, reduced documentation, or negative amortization loan features present. Altogether, these positive trends suggest that a majority of current homeowners can afford their respective mortgages and will not contribute to a bust-type scenario.
Source: Federal Reserve Bank of New York and Goldman Sachs Asset Management. As of June 30, 2021.
Housing inventory has tumbled over the past decade as economic constraints have been amplified by demographic trends. As Exhibit 2 shows, the number of homes currently listed for sale stands 52.5% lower than the median during the 1999-2006 period. On the one hand, home construction over the past decade is down 45% compared to the decade prior to the financial crisis as homebuilders are still cautious from the mid-2000s excess. On the other hand, even the recent increase in housing starts will likely take years to catch up with demand as more Millennials seek to move while more of older generations stay in place. Additionally, as COVID-19 disrupted the trend toward urbanization, prompting a desire for households to de-densify, housing demand has been driven toward less dense urban and suburban areas with traditionally lower supply profiles. This supply-demand mismatch has contributed to the acceleration in prices.
Source: Census Bureau, National Association of Realtors, and Goldman Sachs Asset Management. As of June 30, 2021.
In addition to the short-term factors, we think longer-term structural forces will continue to create positive tailwinds for housing and household formation. The Millennial generation that has notoriously delayed homeownership is now starting to participate in the market. Empirical Research estimates that younger age groups now own 2.8 million homes less than what would be expected form a normal rate, suggesting pent up demand for housing that may emerge as household formation increases sharply from ages 29 to 40. Meanwhile, nearly 60% of the housing stock is owned by people aged 55+, which will restrict the supply of homes for sale. Combined, housing prices should remain firm for the foreseeable future.
Our colleagues in Goldman Sachs Global Investment Research built a statistical model estimating the probability of a 5% or greater decline in US home prices over the next two years, as shown in Exhibit 3, based on house price growth, mortgage debt outstanding, and growth in housing starts. It found that while a housing bust is always a possibility, it does not seem particularly likely at present. The US housing market is hot, but not too hot, in our view.
Source: Goldman Sachs Global Investment Research. As of June 30, 2021. The economic and market forecasts presented herein have been generated by GSAM for informational purposes as of the date of this presentation. They are based on proprietary models and there can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation.