Analyzing the US Housing Market: Insights and Lessons for Indian Real Estate

The US housing market has been experiencing rapid price increases in recent years, raising concerns about affordability and the possibility of a housing bubble. As economic crises in America often have global repercussions, it is crucial to analyze the current situation and draw lessons for the Indian real estate market. In this article, we will examine the data, explore the factors driving price increases, assess the likelihood of a market crash, and discuss the potential impact on Indian real estate.

Home Loan Rates and Housing Demand:

• In January 2021, during the COVID-19 pandemic, home loan rates in the US reached an all-time low of 2.65%, remaining stable until January 2022 at 3.22%.

• As federal fund rates increased, home loan rates rose to around 7% by mid-2023.

• Economic principles suggest that higher home loan rates discourage house purchases, leading to a decrease in sales.

• The US housing market experienced this trend, with sales booming in January 2021 when rates were lowest, reaching the second-highest level after 2006.

• As home loan rates increased, sales started falling every month, demonstrating the direct impact of rates on housing demand.

Price and Sales Correlation:

• In January 2021, when sales started to increase, builders and sellers began raising prices.
• From January 2021 to January 2022, real estate sales remained high, and prices increased for a few months before stabilizing.
• As prices started to rise again in January 2022, sales began to decline.
• When prices started to fall, sales received a boost in February 2023, prompting sellers to increase prices once more.
• Despite fluctuations, housing prices in the US continue to rise, similar to the pattern observed between 2000-2007, which preceded the housing market crash.

Evaluating the Housing Bubble:

• A housing market crash occurs when there is a significant gap between demand and supply, with high supply and low demand forcing sellers and builders to lower prices.

• Despite home loan rates more than doubling in the last two years, there has been no major impact on demand in the US.
• Historical data shows that the average home loan rate over the last 30 years is around 7.74%, with the current rate just above 7%, indicating that people are accustomed to 6-7% interest rates.
• Limited inventory supply, currently at 3 to 3.5 months (ideally 5-6 months for stable prices), is driving prices up.
• Entry-level housing inventory is at a historical low, further contributing to price increases.
• Homeowners who bought houses between 2020 and 2022 at low interest rates are reluctant to sell, as they would face higher interest rates on new purchases, reducing resale inventory.

Potential Crash Scenarios:

Instant increase in inventory supply

• Gradual supply increases would lead to stable prices and slow growth, but not a market crash.

Increase in resale inventory

• This would require home loan interest rates to drop to 3-4%, which is unlikely in the near future.
• Gradual interest rate decreases would not result in a market crash.

Decrease in housing demand

• A survey by Fannie Mae revealed that 82% of people reported improved salary and job stability compared to the previous year but have put their plans to buy a house on hold due to affordability concerns.
• However, a reduction in demand is unlikely, as falling prices would attract buyers and revive demand.

Impact on Indian Real Estate:

• Foreign direct investment in Indian real estate increased six-fold between 2017 and 2022, with NRIs contributing significantly to premium and luxury housing sales.
• If the US housing market crashes, with prices falling by 20-25%, investors may find the US market more attractive, potentially leading to decreased investments in India and a possible crash in the Indian housing market.
• Conversely, if prices continue to rise in the US, India may experience more NRI and FDI investments, driving up prices in the Indian housing market.

Lessons for Indian Real Estate:

1. Indian real estate is influenced by global investors and NRIs, not just domestic buyers.
2. A housing market crash occurs when there is an oversupply of inventory or when artificial demand is created, such as in the US in 2008 and India between 2010 and 2014.
3. When prices become unreasonable and unaffordable, demand may fall drastically, leading to price stagnation or a slight decline, but not necessarily a market crash.

Conclusion:

The US housing market is experiencing price fluctuations and affordability challenges, but a full-fledged market crash seems unlikely due to limited inventory and stable demand. The Indian real estate market, which has seen increasing prices and demand despite rising home loan interest rates, should closely monitor the situation in the US. As global investors and NRIs play a significant role in the Indian market, any major shifts in the US housing market could have ripple effects on the Indian real estate sector. By understanding these dynamics and drawing lessons from the US experience, stakeholders in the Indian real estate market can make informed decisions and navigate the challenges ahead.