Underwriting a Housing Recovery

Housing is making another run at recovery. Following an abortive attempt to trigger a sustained rebound through the first-time homebuyer tax credit, housing outcomes are once again showing signs of improvement. High-level measures of home sales volume, average home prices, and noisier signals like homebuilder sentiment all show some degree of amelioration in outcomes. It is unclear if these trends can strengthen absent more robust job growth, but the improvements are observable nonetheless.

Apart from the relatively smaller inventory of homes for sale and a pattern of slow growth in the number of potential homeowners, the shifting costs of housing alternatives is playing an important role in the latest trends. Courtesy of the historically narrow Treasury yield, mortgage-financing costs are within range of their own record-setting lows. As of September 20, Freddie Mac reports an average 30-year commitment rate of just 3.49 percent. As in the commercial market, the low rate environment is offsetting some of the drag from unusually tight qualifying criteria.

Bargain prices for homes and at the mortgage desk are not the only things supporting the modest uptick in housing demand. Apartment rents continue to push higher, with increases spilling over to lower quality assets. As the cost of renting rises, feeding consumer expectations of future rent increases, housing’s affordability calculus begins to improve. For those who can make the shift, homeownership and the fixed-rate mortgage become hedges against rent inflation.

As the apartment pipeline deals out new inventory, underwriting of future rent growth and occupancy must begin to reflect the potential for a more sustainable balance between ownership and rental demand. While not true for every neighborhood, nor for every cohort of potential buyer, some segments of the market will inevitably see rental demand tempered by housing’s mollified risk profile.