As U.S. markets near the release of Q3 2016 earnings for financial institutions, Kroll Bond Rating Agency (KBRA) notes that credit conditions continue to reflect a benign profile overall, even as it becomes apparent that the increase in asset prices engineered by the Federal Open Market Committee (FOMC) over the past five years is nearing an end, according to a recent report from KBRA.
Specifically, the report states that one of the most important asset classes lifted by low interest rates and quantitative easing by the FOMC has been real property, both commercial and residential. Additionally, the report notes that residential real estate prices have benefitted from a lack of existing and new home supply, low interest rates, and pent-up demand for home ownership. KBRA states that despite the massive expansion of the Fed’s balance sheet, the index for single-family home prices has just barely returned to 2008 levels on a national basis. Likewise, they state that over this same period, household incomes have been flat and home ownership has fallen.
The report also states that with domestic fundamentals in the U.S. housing sector uncertain due to uneven economic growth, an important part of the recent appreciation in U.S. home prices seems to be driven by foreign buyers in more affluent areas. KBRA notes that according to a survey by the National Association of Realtors, foreign buyers purchased $102.6 billion of residential property from April 2015–March 2016, compared with $103.9 billion in the previous 12-months period. They also report that the survey reports that foreign buyers typically purchase more expensive properties and that five states accounted for 51 percent of total residential property purchases: Florida with 22 percent, California with 15 percent, Texas with 10 percent, Arizona with 4 percent, and New York with 4 percent.
KBRA states that as home prices have risen over the past several years, lower-income Americans have been gradually priced out of many of the more expensive markets along the periphery of the U.S., one factor KBRA believes is responsible for the gradual deceleration in home price appreciation. Likewise, KBRA believes that rising prices and falling loan-to-value ratios are great if buyers enter a market early in a credit cycle, but less so for later entrants. The report also states that even with interest rates on home mortgages at historical lows, KBRA believes that there are simply not sufficient numbers created of affordable homes to feed the potential demand – both domestically and from abroad. Housing starts remain below 1 million units annually according to the report, less than half of pre-crisis levels of new home construction and below the average of 1.4 million new housing units annually over the past half century.