The U.S. housing market is expected to be supportive to the economy as a whole more so in the future than earlier during the recovery, a May 13 Bridgewater Associates strategy document reviewed by ValueWalk observed. The more supportive housing market is driven by several factors, some cyclical in nature, that should remain supportive despite the market having to ingest a record number of foreclosures recently.
Bridgewater: Financial crisis negatively impacts household formation, but situation is changing
In the wake of the financial crisis, single-family home construction lagged as bank foreclosures forced properties onto the market at temporarily depressed prices. Household formation, which Bridgewater authors Bruce Steinberg and Christina Kaelin noted typically falls during economic downturns, did just that during the initial stages of the recovery. Limited access to new credit and wounded household finances caused many people, particularly those in their 20s and 30s who are most sensitive to cyclical economic downturns, to postpone living on their own.
That situation is beginning to change, as demand for new homes is rising as inventories, coming off a cyclically depressed bottom, have been rising with household formation as the financial conditions of new homeowners improves. Bench-marking this trend is the fact that early in the financial crisis, 32 percent of all homeowners found themselves financially underwater, while today that number is just 13 percent. What’s more, around the country affordability remains positive relative to historical statistics, although pockets of unaffordability exist (New York City being a prime example).
Supply and demand balance is changing
In a supply and demand market, when prices are low and demand is high it bodes well for that market to move higher and remain stable. The “only real negative” continues to be tight lending standards and mortgage underwriters being bound by strict loan guidelines. This, however, can keep a market from moving into bubble territory.
The supply and demand balance in the housing market has almost turned 180 degrees from crisis levels, as supply is tightening as the “shadow inventory” from the waft of foreclosures that marked the 2008-2009 period has been nearly fully absorbed and low construction levels have left home inventories wanting for new supply.
This all bodes well for household formation and points to a longer runway. Conducting rough estimates, the Bridgewater report observed that if household formation in the 15 to 34 age group just returned to statistical levels consistent with a healthy economy, new demand for nearly one million additional units could be created, boding well for the housing market.