After two consecutive years of double-digit house price appreciation nationally and interest rates drifting higher, it is natural to ask whether the U.S. housing market has peaked. Home price appreciation has been a key component of buoyant consumer balance sheets and has provided a supportive backdrop to residential mortgage credit performance. According to the most recent Federal Reserve data for the period ending June 30, 2021, 20% year-over-year home price appreciation accounted for approximately 20% of the aggregate increase in household net worth since year-end 2019. This has been reflected in mortgage credit performance, with delinquencies as measured by the Mortgage Bankers Association falling to 4.88% after peaking at 8.22% during the post-COVID spike and now within 1.1% of 2019 lows.
We believe strong housing markets are likely to persist into 2022 with prices again rising as much as 10% nationally. Many of the underlying dynamics that drove surging home values in 2020 and 2021 remain intact. Despite the Freddie Mac 30-year average national mortgage rate increasing by 45 basis points from 2021 lows and eroding borrower purchasing power by almost 6%, the ratio of mortgage payments to median household income remains low. Demographic trends such as the growing proportion of the population reaching first-time household formation and home-buying age should continue to support demand for housing, especially in the South and West. Housing supply remains constrained by inventories at record lows: According to the National Association of Realtors, the months’ supply of homes for sale reached an all-time low (1.9 months) in late 2020 and remains at only 2.4 months. New construction is unlikely to keep up with demand as homebuilders have been plagued by materials supply constraints as well as labor shortages that pre-date the pandemic. Finally, despite rising interest rates, the financing environment for homes remains accommodative. For example, the Federal Reserve’s most recent Senior Loan Officer Opinion Survey highlighted loosening bank lending standards for residential mortgages.
In our view, residential mortgage credit securities should continue to benefit from strong housing fundamentals. Robust markets support housing mobility and prepayment activity that reduce mortgage credit securities’ risk profiles. Borrowers with growing equity find greater incentive to keep current on their mortgages, thereby reducing potential defaults and losses. In the event borrowers encounter a life event or loss of income that might result in distress, strong housing markets afford the ability to sell their homes.