U.S. Property Market Begins to Seriously Cool Off. What Could Be the Consequences?

  • 2022-06-01
  • Simona Striževska, Economist at Citadele subsidiary CBL Asset Management

The U.S. property market, one of the health indicators of the American and global economy, has reached pre-pandemic levels in terms of developer sentiment and buyer activity. What are the reasons, and could this impact the Latvian property market?

The property market in the United States can be seen as the canary in the coal mine for the overall U.S. economy. As buyer activity increases, investment in the construction sector and interior furnishings also increases, thus increasing GDP, creating new jobs, and benefiting the overall economy. Homes are also one of the most important household assets, and higher house prices increase well-being and encourage spending.

The property sector has seen fast growth in many countries during the past two years, particularly in the U.S. Massive fiscal and monetary stimuli during the pandemic significantly increased demand by U.S. households for almost everything unaffected by Covid restrictions, including new homes. This created a deficit in housing market, causing prices to climb significantly. This April, average house prices in the USA for new homes were 50% higher than during the pandemic, and 30% higher for used homes.

However, the macroeconomic pulse in the U.S. has slowed significantly recently, against a backdrop of bad news in the real estate market. Since the start of the year, sales have fallen for both new builds and older homes, reaching the lowest levels in two years this April. This pullback in the sector is confirmed by the less-positive outlook in the construction sector, which is impacted not just by a decline in demand, but also an increase in construction costs.

Excessive house prices had previously had a partial impact on demand, but the main reason for the cooling U.S. housing market is in the U.S. Federal Reserve System’s (hereafter: FRS) interest rate change. As the FRS moves to an aggressive inflation-beating regime, the 30-year mortgage rate in the U.S. over the past five months has grown from slightly over 3% to 5.3%. Mortgages have become significantly more expensive for buyers. This, in turn, may be the start of an organic rebalancing of supply and demand in the U.S. market, as a result of which house prices should also return to normal levels. 

Does this definitely mean that the U.S. economy is sliding towards a recession? The aim of the FRS as it fights inflation is to swiftly reduce demand in the United States. Targeted rate raises by the FRS in the near future would mean much slower economic growth or even stagnation in the U.S., but, at least for now, there are no warning signs in other economic indicators. Despite high inflation, demand in the US remains high, and business outlooks, although less positive, remain optimistic.

There is no significant direct impact on the Latvian economy from this cooling down of the US housing sector. Lower demand for building materials and raw materials on a global scale could even, from a price perspective, benefit the construction sector. However, more importantly, similar changes to Eurozone monetary policy are in the works. High and consistent inflation will force the European Central Bank to act in the coming months and raise rates for the first time since 2011. Unlike for mortgage holders in the USA, interest rates in Latvia aren’t fixed and are directly impacted by decisions made by the ECB. Therefore, rate hikes in the Eurozone will impact not just new buyers, but also existing Latvian borrowers.

About CBL Asset Management 

Citadele Bank’s subsidiary, IPAS CBL Asset Management, is one of the leading and most experienced financial asset management companies in the Baltics, employing globally recognised fund managers. It has managed investment portfolios since 2002. Meanwhile, in 2003, it became one of the first in Latvia to manage level 2 pension savings. In 2022, it was the first in the Baltics to create a passive level 2 pension plan with zero commission. CBL Asset Management has the largest team of managers in Latvia, which regularly analyses the financial and capital market and macroeconomic trends using their experience and the latest technologies, investing pension savings in both large international and local Latvian businesses, as well as in the bonds of various countries.