In October, the reading of the US Home Purchase Contract Signings Index fell 4% month-on-month to 73.9 points, the second lowest reading in the past 20 years. This represents a 37.8% year-on-year decline in the number of homes sold. At the same time, the Case Shiller Home Price Index (CSHPI) increased by 8.6% year-on-year. Average interest rates on 30-year mortgages have doubled since the beginning of the year to 6.3%. Could there be a collapse in this market and would it be a bigger crisis than in 2008?
2008 is still a long way off...
The financial crisis of 2008 was one of the biggest financial crises in the history of the current century. It had its origins in late 2007, when problems began to emerge in the US real estate market. Many banks and investment companies invested in financial instruments based on property prices. When property prices began to fall by up to more than 10% year-on-year, these instruments lost value, resulting in losses for many financial institutions.
The first victim of the crisis was Lehman Brothers, which declared bankruptcy on 15 September 2008. This caused panic in the financial markets and put many other financial institutions in trouble. In response to the crisis, governments and central banks around the world took action to protect financial institutions and stabilise markets. In many countries, assistance programmes were introduced to help companies and individuals affected by the crisis. The largest cycle of printing and cheap money in US history was also launched.
At present, lending rates are at the level of the property crisis. The downward trend in building permits for new homes may also seem worrying, but here the value is nearly 50% higher than in 2008. The situation for the moment seems to be saved by average property prices, which are currently rising by 14.7% year on year. Unfortunately, the pessimistic attitude of consumers and businesses towards the coming months and the drastically declining demand may have led, among other things, to a more than 30% drop in the iShares Mortgage Real Estate ETF (REM) giving exposure to broad real estate companies.
Source: Conotoxia MT5, REM, Daily
Are we in for a real estate slump?
The mortgage debt service payment as a percentage of disposable personal income in the USA currently stands at 3.9% and the total debt in relation to disposable income at 9.7%. These values are among the lowest in 50 years. By comparison, the same parameters in 2008 were 7.1% and 13.1%. This means that it now costs the average US citizen almost twice as much to pay a mortgage installment in relation to their earnings. It should also be taken into account that most home loans are taken out at a fixed interest rate, so that their drastic increase over the past months wouldn’t necessarily lead to a repayment problem. For this reason, an investment in the iShares Residential and Multisector Real Estate ETF (REZ) seems relatively safe. It is a passive fund that invests in real estate companies involved in residential and commercial rental and property management. It has historically performed better than the broad property market. Nevertheless, we may currently see a discount of 30% on it.
Source: Conotoxia MT5, REZ, Daily
Grzegorz Dróżdż, Junior Market Analyst of Conotoxia Ltd. (Conotoxia investment service)
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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