US house prices ‘out of step’ with market fundamentals: Dallas Fed

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Against a backdrop of rising consumer price inflation to multi-decade highs, the historic acceleration in the US. prices since the start of the COVID-19 pandemic are “out of step” with market fundamentals, according to a blog mail by the Federal Reserve Bank of Dallas.

“Our evidence points to abnormal behavior in the US housing market for the first time since the boom of the early 2000s,” the Dallas Fed said, citing real-time housing market data characterizing possible signs of “exuberance”. The data suggested that “the US housing market has been showing signs of exuberance for more than five consecutive quarters through the third quarter of 2021.”

The price-to-rent ratio, in particular, has decoupled from market fundamentals and entered the stage of exuberance, or “explosive appreciation driven by expectations,” the Dallas Fed researchers noted. For the company-specific context, Pennsylvania REITs (PEI) strong fourth quarter funds from mirrored operations higher rents and occupancy rates. this comes as rental affordability The problems increased in February, as US residents spent an average of 30% of their monthly budgets on rent.

The researchers also pointed to the relationship between home prices and disposable income, a measure that is directly related to housing affordability. “The rapid rise in the near-threshold statistic through 2021 indicates that real US home prices may soon become decoupled from personal disposable income per capita.” In an environment where consumer purchasing power is declining, real disposable income contracted by 1.6% year-on-year in February and has been in negative territory since April 2021, almost in tandem with real economic growth peaked, according to data from fred.

Unlike the Great Financial Crisis of 2007-2009, household balance sheets appear to be in better shape along with stronger capital positions, suggesting that any economic setback from a correction in house prices will not be same scale experienced during the GFC, according to the Blog.

The US is not the only country experiencing home price inflation:

The rise in house prices has been a “global phenomenon,” Charles Schwab chief investment strategist Liz Ann Sonders wrote on Twitter. mail 28th March. In fact, 30 of 60 countries (including domestic and emerging markets), “have seen real house price inflation of >5%,” she added, citing data from Capital Economics and Refinitiv.

Looking at the global housing boom from a different angle, “The ‘Global Real House Price Index’ over the past 50 years shows the 3 periods when excessive easing led to housing bubbles:” First at the end of the 1980s driven in Japan, the second in the early 2000s driven in the US and the European Union, macro analyst Adem Tumerkan wrote on Twitter. mail March 30th. “Through reversion to the mean, home prices will eventually sink,” she added. Meanwhile, bond investors are pricing in the Fed’s transition to tighter monetary policy, with short-term Treasury yields rising rapidly and in some cases outperforming long-term ones in a move that usually precedes a recession or a slowdown in economic growth and inflation expectations. .

Home Builders: DR Horton (goat), KB Start (KBH), Pulte Group (PHM), Toll Brothers (TOLL), Lennar (LENGTH), Beazer Homes (BZH), Tri Tip (HTP), Hovnan companies (UPS), DVR (NVR), Taylor Morrison (TMHC) and Merit Homes (MONTH).

Apartment REIT – Preferred Apartment (APTS0, Equity Residential (EQR), Real Estate Independence (WROTE), Avalon Bay (BAV), blue rock (BRG), Camden (CPT), apartment rent (AIR), Mid-America Apartment (COUNTRY) and Veris (none).

At the end of March, mortgage rates exceeded 4.5% at highest since 2018.

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