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Reflections #33 - US housing market remains strong

Today's US housing starts came in well above forecasts at 1.63M for May.

With US mortgages rates trading at the highest levels since 2008, why is the US housing market so resilient?

First, the US economy is still holding up well and the labour market remains very tight. As long as unemployment remains low, consumer and housing demand is likely to stay strong.

Second, mortgage rates traded between 2.5% and 4.0% for over a decade. Most homeowners locked in a very attractive mortgage rate with the average between 3.0% and 3.5%.

As home owners are unlikely to trade their low locked-in mortgage rate for a new mortgage with much higher rate, existing home sales have dried up and activity has moved to housing starts.

This divergence is likely to continue until the economy slows and unemployment rises which may then increase supply in the existing home sales market.


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