Will Lumber Costs Prick US Housing Bubble or Will Low Mortgage Charges Prevail?

US Housing Market Outlook:

• There’s lots of chatter amongst market members concerning the state of the US housing market, which has seen its strongest run of value progress since 2006 – proper earlier than the US housing bubble burst, which helped result in the International Monetary Disaster.
• Provide chain points (e.g. closed sawmills) have helped elevate lumber costs to all-time highs, resulting in over a $35Ok enhance in new residence costs within the US because the begin of 2021.
• Low mortgages have stored measures of housing affordability inside purpose, however US Treasury Secretary Janet Yellen’s warning this week about larger rates of interest are a stark warning.

Considerations About US Housing Market, Overheating Economic system

There’s lots of chatter amongst market members concerning the state of the US housing market, which has seen its strongest run of value progress since 2006 – proper earlier than the final US housing bubble burst, which helped result in the International Monetary Disaster. Considerations had been heightened this week after US Treasury Secretary Janet Yellen stated that “it could also be that rates of interest should rise considerably to ensure that our economic system doesn’t overheat” when discussing the potential influence of US President Joe Biden’s newest stimulus invoice.

Google Traits “Housing Bubble” (Could 2011 to Could 2021) (Chart 1)

This isn’t only a concern from policymakers. On a regular basis Individuals are taking discover of the state of the US housing market too. In truth, Google searches for the time period “housing bubble” are approaching their highest degree over the previous ten years. The large questions for merchants and buyers alike are thus: wsick the Fed’s regime of low charges proceed to entice homebuyers as mortgage charges stay traditionally low? Or will rising prices sideline patrons – and at last take air out of the current US housing value bubble?

Uncooked Supplies Pushing Costs

“Development” was anticipated to be the story of 2021, thematically talking. The rise in commodity costs reinforces the concept that this expectation has develop into actuality. However lumber costs are blowing away different main commodities by way of their value efficiency year-to-date, up by almost +95%: corn is up over +51%; copper has gained over +34%; and wheat costs are up a paltry +19% by comparability.

Lumber Futures Worth Chart: Weekly Timeframe (Could 2011 to Could 2021) (Chart 2)

The US housing stock is at its lowest degree in 4 many years, whereas provide chain points (e.g. closed sawmills) have helped elevate lumber costs to all-time highs, resulting in over a $35Ok enhance in new residence costs within the US because the begin of 2021. Till provide chain points are resolved, enter prices for brand spanking new houses will stay excessive, successfully squeezing a sure section of first-time homebuyers out of the market.

Housing Affordability Metrics Steady

Although housing enter prices have run larger alongside different commodity costs, measures of housing affordability have solely simply began to fall. The US-based Nationwide Affiliation of Realtors produces varied measures of housing affordability, together with one measure that’s tethered to the typical 30-year mortgage price derived from the Freddie Mac Main Mortgage Market Survey:

NAB Housing Affordability Index: Month-to-month Timeframe (Could 1991 to Could 2021) (Chart 3)

In the beginning of 2021, housing affordability was at its greatest degree going again to early-2013, in accordance with the NAR Housing Affordability Index. Curiously, the final time this measure of US housing affordability (previous to the current decline) was this excessive was proper earlier than the 2013 Taper Tantrum; we might have simply skilled a ‘taperless tantrum’ in current weeks.

Mortgage Charges Low, However…

Low mortgages have stored measures of housing affordability inside purpose, however US Treasury Secretary Janet Yellen’s warning this week about larger rates of interest are a stark warning. Current adjustments have been fast and subsequently disagreeable, disadvantaged of the historic context of the US housing market past the scope of the pandemic.

Freddie Mac US 30-year Mortgage Fee: Weekly Timeframe (Could 2011 to Could 2021) (Chart 4)

For now, the US Treasury yield curve has remained tame, which in flip has relieved upside strain on mortgage charges (that are tethered to the long-end of the US yield curve). Some fast scratch math exhibits that, on a $500,000 mortgage, for instance, if charges had been to rise by one other 50-bps, American owners would ship round one other $1600 out the door annually.

Is there a US Housing Bubble? Will it Burst?

The US housing market has been on a tear in current months, little question. However going as far as to name it a bubble could also be a bridge too far, on condition that US mortgage charges stay traditionally low and that measures of housing affordability stay traditionally wealthy. Home value progress will possible reasonable henceforth, however a dramatic flip decrease appears unlikely within the very near-term.

— Written by Christopher Vecchio, CFA, Senior Forex Strategist