Home Price Growth Boosts US Housing Economy

The U.S. residential housing economy, which represents about 17% of GDP, is expected to continue growing in 2H24 despite record levels of unaffordability due to high home prices and mortgage rates, Fitch Ratings says. This expansion supports the credit profiles of homebuilders, with home price growth and the tight labour market underpinning low mortgage delinquencies.

The large millennial generation is driving household formation and housing demand, which remains above long-term averages as reflected in the percentage of homes sold above list price. The disparity between relatively resilient demand trends and much weaker sales, as well as multi-decade low rental and homeowner vacancy rates, underscore the tight housing market.

Housing prices have jumped more than 45% since 2020, driven largely by low inventory. While new construction may be necessary to create slack in the market, over the longer term, the rebalancing needed to alleviate price pressures will originate from lower rates that ease the lock-in effect. Fitch projects 30-year mortgage rates will end the year at around 7% before falling into the 6% range in 2025.

Residential mortgage delinquencies remain near their lowest levels in years. Nevertheless, the average mortgage payment on newly originated loans has nearly doubled versus loans originated in 2020, and increasing tax and insurance payments contribute to higher all-in housing costs, which may pose payment shock risk.

Total housing starts marginally declined by 0.6% yoy in April as the weakness in multifamily starts offset strong single-family housing starts. Fitch expects single-family starts to improve 3.4% this year and multifamily starts to fall to levels in line with 2018–2020 averages. Multifamily starts have declined over 30% YTD against a backdrop of higher cost of capital, tighter lending standards and slower rent growth.

Fitch expects housing inflation to decline by approximately 100 bps in 2H24 as lower rents feed through to CPI.