US HOUSING: BOOM OR BUST OR SOMEWHERE IN BETWEEN?
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Perspective from
Franklin Templeton
Fixed Income
US HOUSING: BOOM OR BUST OR
SOMEWHERE IN BETWEEN?
August 2021 Last year, as pandemic-led economic impacts began to be felt, many worried the US housing
market was vulnerable to a slowdown. We believed that the housing sector would prove
to be resilient as the strength of household balance sheets and accommodative monetary
policy would support the market through the economic downturn.
Fast forward one year and the sector remains remarkably strong, with surging demand and
limited supply driving housing price appreciation (HPA) of 13.3% year-over-year (y/y),
as of March 2021.1 Past housing boom and bust cycles and the recent white-hot nature of
real estate markets nationwide have some weary about the future of the sector. While
headwinds exist, we believe underlying fundamentals are supportive of continued strength
in the sector and positive HPA.
This paper discusses the factors that drove the strength in the housing market and led to
strong HPA over the last year and our outlook for the sector going forward.
• Housing demand has been robust due to steady household formation and elevated
homeownership levels.
• Supply has remained at historically-low levels with pandemic-fueled demand exacerbating
the shortage.
• Forbearance programs have given homeowners a temporary reprieve and much needed
time to become more financially stable, resulting in low levels of defaulted properties.
• Lending conditions remain tight.
• Record low mortgage rates have supported housing affordability. However, wages have not
kept pace with HPA, and double-digit HPA could impact affordability, even with rates
remaining low.
• Homebuilder sentiment has been persistently strong, while home buyer sentiment has
deteriorated recently.
• Higher mortgage rates, a supply shock from forborne properties and continued high HPA
are potential headwinds for the housing sector.
• Our proprietary HPA model projects a 5.6% home price growth rate through March 2022.
HOUSING DEMAND
Housing demand has remained incredibly strong partly due to steady household formation
(Exhibit 1). For the past 14 quarters, household formation has averaged over 1.5 million
over the previous year, with most formations being homeowners rather than renters
(Exhibit 2), resulting in a steady uptick in the US homeownership rate since 2015
(Exhibit 3). The number of homeowners has risen steadily since 2016 while the number of
renters has declined over the same period.
HOUSING DEMAND REMAINS INCREDIBLY STRONG
Exhibit 1: Household formation Exhibit 2: Ownership vs. rentership households
December 2001–March 2021 Q1 2010–Q1 2021
Thousands (’000)
5,000 10,000
4,000 8,000
6,000
3,000
4,000
2,000
2,000
1,000
0
0 -2,000
-1,000 -4,000
Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Mar Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1
’01 ’03 ’05 ’07 ’09 ’11 ’13 ’15 ’17 ’19 ’21 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19 ’20 ’21
■ Owner ■ Renter
Exhibit 3: US homeownership rate Exhibit 4: Change in homeownership since 2015
March 1969–March 2021 Q1 2015–Q1 2021
70% 20%
69
15
68
67 10
Current
66 65.6%
65 5
Long Term Average
65.28%
64
0
63
62 -5
Mar Mar Mar Mar Mar Sep Mar Sep Mar Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1
1969 1975 1982 1988 1995 2001 2008 2014 2021 2015 2016 2017 2018 2019 2020 2021
US Under 35 35–44 45–54 55–64 Above 65
Sources: Franklin Templeton Fixed Income Research, US Census Bureau, Yardini Research, Bloomberg.
2 US housing: Boom or bust or somewhere in between?
Looking at homeownership data by age (Exhibit 4 on the previous page) highlights that
Homeownership rate:
since 2015 most of the homeownership uptick has been driven by younger demographic
A caveat
cohorts. Homeownership in the “under 35” and “35–44” age groups grew by 10%
In the first (Q1) and third
quarters (Q3) of 2020, the and 6%, respectively, while all other cohorts remained flat or declined slightly during the
homeownership rate (Exhibit same period. Pent-up demand from the millennial generation has primarily been
3 on the previous page) saw realized in the last five years, but with a homeownership rate of 38.1% for the “under 35”
a dramatic spike, which we
believe was erroneous due to
cohort, we believe there may still be room for further increases.
data collection issues.
During this period of the
Pandemic-related demand trends have emerged as shifting dynamics in savings, consump-
pandemic, there was a sharp tion, mobility and increasing net worth all boosted housing demand. As consumers spent
decline in the survey less on travel, leisure and entertainment and saved more, coupled with regional lockdowns
response rate, which has
fueling the desire for more space, consumers shifted spending towards housing. For those
been highlighted by the US
Census Bureau. Since that with workplace flexibility, being able to work remotely allowed for greater mobility and
time, the response rate has supported demand in more diverse geographic locations. Remote work capabilities and
rebounded and fourth increasing net worth also accelerated purchases of second homes by wealthier households.
quarter (Q4) 2020 and Q1
2021 figures appear to
capture a more accurate HOUSING SUPPLY
rate. The homeownership
Since the global financial crisis (GFC), housing supply has not kept pace with demand—
rate moved from 65.3% in
Q1 2020 to 65.5% in Q1 a trend we have seen not only in the United States, but in most developed economies,
2021, a slight increase but including the United Kingdom and in Europe. Post-GFC, anemic demand and heavy inven-
not the significant surge that tories led to a correction in home prices and financial stress led many homebuilders
second quarter (Q2) and Q3
2020 data suggest.
to go out of business. As a result, homebuilder sentiment turned exceptionally negative, and
supply remained constrained for years following the crisis. Pre-GFC, from 2003–2006,
single-family permits and starts averaged roughly 1.5 million units annually but have
averaged only 900,000 units annually over the past four years (Exhibit 5), leading to an
estimated annual shortfall of three to five million homes, according to Harvard Joint Center
for Housing Studies.2 Over the same period, household formations remained robust,
putting pressure on homes available for sale.
HOUSING SUPPLY HAS NOT KEPT PACE WITH DEMAND
Exhibit 5: Single-family permits, starts and completions Exhibit 6: New and existing housing inventory
November 2000–April 2021 March 2003–March 2021
SAAR (’000) Units (’000)
2,000 5,000
1,800
4,578 (July 2007)
1,600 4,000
1,400
1,200 3,000
1,000 Long Term Average: 2,749
800 2,000
600
400 1,000
Current: 1,378
200
0 0
Nov Jun Jan Aug Mar Oct May Dec Jul Feb Sep Apr Nov Apr Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar
’00 ’02 ’04 ’05 ’07 ’08 ’10 ’11 ’13 ’15 ’16 ’18 ’19 ’21 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021
Permits Starts Completions
Sources: Franklin Templeton Fixed Income Research, Morgan Stanley, National Association of Realtors, US Census Bureau.
3 US housing: Boom or bust or somewhere in between?
As noted in the previous section, unique trends have also emerged on the supply side due
to the pandemic. Potential sellers curbed showings and open houses, leading to low
visibility of inventory. As young adults moved back home or started working from home,
older homeowners who would have historically looked to move or downsize refrained
from selling. Consequently, total inventories (Exhibit 6 on the previous page) experienced a
sharp drop during the pandemic. Recently, housing permits and starts have begun to
tick up due to strong homebuilder confidence, yet remain far below where excess supply
would negatively impact home prices.
Supply from forborne borrowers
Currently about 2.18 million borrowers are in forbearance.3 Forbearance has kept inventory
levels low by preventing defaulted properties from reaching the market. During the GFC,
the excess supply of defaulted properties severely impacted home prices, which experi-
enced a roughly 30% correction post-2007. Total inventory, including distressed inventory,
during the GFC reached nearly eight million properties. Even if all current forborne
mortgages were added to new and existing inventory (Exhibit 6 on the previous page),
current total inventory would only reach 3.5 million, less than half of the peak during the
GFC. However, we expect that forborne borrowers are likely to opt for a full 18-month
extension and estimate that only 600,000–700,000 homes will be added to total inventory.
We do not anticipate any significant home price impact due to this additional supply.
FORBEARANCE HAS KEPT INVENTORY LEVELS LOW
Tight lending conditions
Post-GFC lending conditions and underwriting standards have been tight, leading to high-
er-quality borrowers comprising a majority of mortgage originations. Additionally, there has
been a significant decline in what are considered riskier mortgage products such as
balloons, hybrid adjustable-rate mortgages (hybrid-ARMs) and interest-only mortgages.
Sub-prime issuance, which peaked at almost $400 billion pre-GFC, has declined to approx-
imately $40 billion today.4 Mortgage origination data further highlights more stringent
lending standards, as only 25% of originations in Q4 2006 were in 760+ FICO compared to
70%+ of originations as of Q4 2020 (Exhibit 8 on the next page).
MORE STRINGENT LENDING 100%
STANDARDS LED TO HIGHER-
90
QUALITY BORROWERS
Exhibit 7: Mortgage 80
originations by credit score
70
Q1 2004–Q1 2021
60
50
40
30
20
10
0
Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
■While post-GFC lending standards have been significantly tighter than the pre-GFC era, a
trend of gradual loosening occurred from 2013 to 2019. Most of this loosening has reversed
since the pandemic (Exhibit 8). The Mortgage Credit Availability Index is currently at
128.1 as of April 2021, tighter than its pre-pandemic level around 185. After tightening for
three quarters, Q1 2021 saw some loosening of lending standards as reported by the
Senior Loan Officer’s Opinion survey.5
POST-GFC LENDING Index
STANDARDS SIGNIFICANTLY 900
TIGHTER THAN PRE-GFC
800
Exhibit 8: Mortgage credit
availability index 700
June 2004–April 2021
600
500
400
300
128.1
200
100
0
’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19 ’20 ’21
Sources: Franklin Templeton Fixed Income Research, Mortgage Bankers Association.
Affordability
Housing affordability has been negatively impacted by nearly eight years of positive HPA,
and further exacerbated by stagnant wage growth over the same period. The National
Association of Realtors (NAR) Affordability Index (Exhibit 9 on the next page) measures
whether a family earning the median family income can qualify for a mortgage for a median
price single-family home at prevailing mortgage rates. Lower mortgage rates over the past
decade have kept homes affordable relative to their long-term averages (Exhibit 9—green
line on the next page). However, affordability evaporated when prevailing mortgage rates hit
5.0% in Q4 2018, with the NAR Affordability Index falling to long-term averages. Since
then, home prices have increased 19%.6 Factoring in the increases in home prices and
adjusting for wage growth, a home purchased today at a 4.25% 30-year mortgage rate is
the equivalent of purchasing the same home at a 5.0% rate in 2018, all else equal.
Home Builder Sentiment
The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index
(Exhibit 10 on the next page) is based on a monthly survey of NAHB members and
designed to take the pulse of the single-family housing market. The survey asks respon-
dents to rate market conditions for the sale of new homes, including prospective buyer
traffic, at the current time and over the next six months. After a sharp decline with
the pandemic, homebuilder confidence has recovered to all-time highs and remains at its
highest level in 35 years.7 Tight supply and home price appreciation are bolstering
builders’ sentiment, which is evidenced in an uptick in starts and permits, despite climbing
lumber prices adding significantly to building costs. In contrast, despite low mortgage
rates, home buyer sentiment has been hurt by higher home prices.
5 US housing: Boom or bust or somewhere in between?RECORD LOW MORTGAGE 220
RATES SUPPORTING HOUSING
AFFORDABILITY
200
Exhibit 9: National
Association of LT Avg (2010-Current): 170
Realtors Homebuyer 180
Affordability Index
November 1990– 160 LT Avg (2000-Current): 150
March 2021
LT Avg (Since Inception): 140
140
Current Value: 173.6
120
0
Nov Nov Nov Nov Nov Nov Nov Nov Nov Nov Mar
1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2021
Sources: Franklin Templeton Fixed Income Research, National Association of Realtors. To interpret the index, a value of 100 means that a
family with the median income has exactly enough income to qualify for a mortgage on a median-priced home. An index above 100
signifies that family earning the median income has more than enough income to qualify for a mortgage loan on a median-priced home,
assuming a 20 percent down payment.
TIGHT SUPPLY AND HOME 100
PRICE APPRECIATION
BOLSTERING BUILDERS’
SENTIMENT 80
Exhibit 10: National
Association of Home
Builders/Wells Fargo 60
Housing Market Index
April 1985–April 2021
40
20
0
Apr Apr Apr Apr Apr Apr Apr Apr Apr Apr
1985 1989 1993 1997 2001 2005 2009 2013 2017 2021
Market index Traffic Future sales Present sales
Sources: Franklin Templeton Fixed Income Research, Mortgage Bankers Association.
HOUSING ACTIVITY
Housing activity remains healthy with mortgage applications and new and existing home
sales all increasing on a y/y basis. After a pandemic-induced sharp decline in 2020
(Exhibit 11—green line, on the next page), mortgage purchase applications have staged a
strong recovery and 2021 year-to-date (YTD) activity (Exhibit 11—blue line, on the
next page) has continued to run higher than previous years. Similarly, existing home sales
(Exhibit 12, on the next page) climbed 34% y/y in April 2021 and new home sales
(Exhibit 13, on the next page) jumped 48% in April 2021 y/y.
6 US housing: Boom or bust or somewhere in between?HOUSING ACTIVITY Index
REMAINS HEALTHY 400
Exhibit 11: MBA Purchase
Application Index* 350
2016–June 2021 300
(Not Seasonally-Adjusted)
250
200
150
100
50
Jan 1 Jan 31 Feb 28 Mar 31 Apr 30 May 30 Jun 29 Jul 29 Aug 28 Sep 27 Oct 27 Nov 26 Dec 26
2021 2020 2019 2018 2017 2016
Exhibit 12: Existing Millions
home sales 0.7
2017–May 2021
(Not Seasonally Adjusted) 0.6
0.5
0.4
0.3
0.2
Jan Feb Mar Apr May Jun Jul Aug Oct Oct Nov Dec
2021 2020 2019 2018 2017
Exhibit 13: New home sales Thousands
1,200
2017–May 2021
(Not Seasonally Adjusted) 1,100
1,000
900
800
700
600
500
400
300
Jan Feb Mar Apr May Jun Jul Aug Oct Oct Nov Dec
2021 2020 2019 2018 2017
Sources: National Association of Realtors, US Census Bureau, Mortgage Bankers Association. * Index, March 1990 = 100
7 US housing: Boom or bust or somewhere in between?Franklin Templeton Fixed Income Home Price Appreciation Forecast
Our proprietary HPA model projects home prices over the next 12 months—we use our
model coefficients and inputs from Franklin Templeton Fixed Income Group’s Research and
Strategy Team (FIRST) macroeconomic projections for gross domestic product (GDP),
unemployment, inflation and the 10-year US Treasury note yield to forecast the Case-Shiller
Index (seasonally adjusted) for 2021 and 2022. Based on this model, we project 5.6%
HPA through March 2022. We expect home prices will continue to rise, albeit at a slower
pace than the past 12 months, and our baseline projection for 2021 is 5.55% and
3.26% for 2022. (Exhibits 14 and 15).
FRANKLIN TEMPLETON FIXED Exhibit 15: Case Shiller Index (seasonally adjusted) percentage change Y/Y with projections
INCOME—FORECASTS As of May 2021
Exhibit 14: Home price
Index
appreciation model forecast
20
As of May 2021
15
2021 2022
Upside 7.36% 4.61% 10
Baseline 5.62% 3.49%
5
Downside 3.65% 2.75%
0
-5
-10
-15
Jun Oct Feb Jun Oct Feb Jun Oct Feb Jun Oct Feb Jun Oct Feb May Dec
2001 2002 2004 2005 2006 2008 2009 2010 2012 2013 2014 2016 2017 2018 2020 2021 2022
Baseline Downside Upside
OUTLOOK
We expect supply and demand imbalances in the housing market to persist, supporting
home price appreciation over the short to intermediate term. Pandemic-driven trends
such as increased saving rates and demand for more space, coupled with historically low
mortgage rates, fueled a home buying frenzy that has continued thus far in 2021.
Seemingly endless demand and minimal supply have led to concerns of the housing market
overheating. However, tight lending standards and payment relief programs, such as
forbearance, appear to support a sound fundamental backdrop for the housing sector and
we do not believe we will have a repeat of the situation seen in the excessive housing
leverage-led GFC.
While the housing sector appears fundamentally solid, there are several potential headwinds
facing the sector that we will continue to monitor over the near and intermediate term.
From an affordability perspective, higher mortgage rates and continued significant home
price appreciation can limit future demand, especially as wages have continued to lag HPA.
Housing supply is currently extremely limited, and we believe that will remain the case over
the near term, but there is a potential pipeline of heavy supply that could weigh on the
market. Pent-up supply could come from a combination of sources, including older home-
owners who would typically downsize but did not sell during the pandemic, forborne
properties, and new housing supply from exuberant homebuilders. We do not expect these
headwinds to present an immediate danger to the housing market, but if they were to occur
in tandem, it would create a sizable challenge for an otherwise healthy market.
8 US housing: Boom or bust or somewhere in between?CONTRIBUTORS
Paul Varunok Neil Dhruv Aviraj Chatterjee, CFA
Senior Vice President, Vice President, Senior Research Analyst
Director of Securitized Portfolio Manager Franklin Templeton
Research and Trading, Franklin Templeton Fixed Income
Portfolio Manager Fixed Income
Franklin Templeton
Fixed Income
Endnotes
1. Source: S&P CoreLogic Case-Shiller US National Home Price Seasonally Adjusted Index (y/y %).
2. Source: The Extraordinary and Unexpected Pandemic Increase in House Prices: Causes and Implications Published on January 7, 2021.
3. Source: BlackKnight. As of May 17, 2021. Forbearance is when your mortgage servicer or lender allows you to pause or reduce your mortgage payments for a limited period of time.
The CARES Act, passed in March 2020, provided mortgage payment forbearance options for all borrowers who, either directly or indirectly, suffer a financial hardship due to the
COVID-19 national emergency.
4. Non-qualified mortgage issuance volumes.
5. Sources: Survey as of April 2021.
6. Sources: S&P CoreLogic Case-Shiller US National Home Price Seasonally Adjusted Index (As of 3/31/2021).
7. Source: National Association of Home Builders. As of May 2021.
WHAT ARE THE RISKS?
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losses if the investment manager’s judgment about markets, interest rates or the attractiveness, relative values,
liquidity or potential appreciation of particular investments made for a portfolio, proves to be incorrect. There can be no
guarantee that an investment manager’s investment techniques or decisions will produce the desired results.
9 US housing: Boom or bust or somewhere in between?IMPORTANT LEGAL INFORMATION This material is intended to be of general interest only and should not be construed as individual investment advice or a recommen- dation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton. The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. 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