Macro Report:Recent US housing market data still solid,but downturn risks may rise in 2017

The US housing market remained resilient throughout 3Q16, as the low interest ratecontinued to support home sales. Mortgage rates continued to fall over the past severalmonths, with the 30 year mortgage rate falling to 3.71% in September. In the year to date,new home sales averaged 564k sales per month, compared to 2015’s average of 502k.

    Existing home sales averaged 5.4 mn per month, up from 2015’s average of 5.23 mn, thoughmomentum began to slow in 3Q16 overall.

    The US housing market has outperformed expectations in 2016, but the outlook is mixed.

    Factors supporting the housing market outlook include the NAHB index, which continued toshow strength, at recovery highs and in line with pre-crisis levels. With strong builderconfidence, we should see housing starts and permits remain stable in the near term,although zoning restrictions continued to cap permit issuance at a relatively steady rate. Pentup demand for housing amid low inventories means there is still some room for improvement.

    Factors that may bring about some concern include the fact that housing prices havereturned to pre-crisis highs. Housing prices have outpaced wage growth significantly, andhome ownership rates have fallen to a 50 year low, indicating that housing may beunaffordable for many. Furthermore, with signs of inflation warming, the US is likely to hikerates in December barring significant deterioration of upcoming data, and is likely to continueto hike rates at a gradual pace in 2017, which should eventually push mortgage rates higheras well, removing a major source of support for the housing market. A rate hike could alsolead to higher yields elsewhere, which would also reduce real estate speculation.

    A general slowdown of the economy could also dampen the housing market performance,and vice versa. Recession scares and volatility seen in 2016 indicate that downside riskremains despite most indicators pointing to a rebound in the short term. While the housingmarket should remain resilient in 4Q and the start of 2017, we see rising downside risks inlater 2017. As a net contributor to GDP growth in 18 of the past 21 quarters, a downturn ofthe housing market would have significant ramifications on the US growth outlook.