The US housing market is challenged in the short term, but the outlook is good

The US housing market retains solid fundamentals. Demand for houses should continue to benefit from the population growth and the demand for larger and more modern properties in a context where many american homes are old and costly to renovate.

Yet, when looking at the stock prices of the largest US home builders such as Lennar Corporation or Pulte Homes, it is clear that something is not right. One could be quick to say that this is due to higher mortgage costs. But this is not the case as these stocks were in a positive up trend in 2024.

In the short term however, demand is low and this is the consequence of the current decline in consumer confidence and higher prices. Housing prices have increased at significantly higher rates than inflation, rising 55% since the end of 2019, i.e. a rate of +9.2% pa. As comparison, average US wages rose 29% over that period, i.e. a rate of +6% p.a.  While home builders hold currently low levels of inventory, which means that they are not in any need to discount prices, they are clearly not seeing high demand from consumers.

Yet, the ratio of the average US house price to the average US annual income is about 7x. While this is above US, this ratio remains quite low as compared to many developed countries in Europe or Asia where the ratios are closer to 15x.