In order to introduce the housing market, it is necessary to understand its relevance and total value. The total housing market value was $43 trillion in 2022, according to Zillow Research. It represents 27% of all household net worth in the US, and it is almost twice the size of the US GDP (U$ 23 trillion). Residential also is the largest investment for 50% of the US population, with 58% of their total household net worth. Not only is it the primary asset, but it is also the largest debt component; mortgage debt represents 69% of total household debt, or $11.4
trillion. Therefore, the housing levels are also relevant to the overall US CPI; shelter is the most representative indicator, weighting 32%. Another statistic to highlight is the current 65.5% homeownership rate of all US households. Naturally, households under 35 years old have a much smaller percentage — 38,1% homeowners and 61,9% renters — and households over 65 years old have the opposite —79,3% homeowners and 20,7% renters.
The residential sector can be divided in three main subsectors:
Multifamily homes contain separate residential units within a single structure. A residential unit here is defined as a room or group of rooms. The units can be adjacent either horizontally or vertically, and they typically share a heating system and public utilities such as water and sewage. Apartment buildings, condominium complexes, and duplexes are all considered multifamily homes. Multifamily properties are usually owned by investors in order to rent.
A single-family home is a freestanding structure that shares no common walls with another residence. These homes tend to be occupied by the owner of the property, although a few REITs and institutions are now investing in them.
A manufactured home is a factory-built residence that can be placed on a piece of land and costs much less than a traditional new build. The total rent, which includes both the land and the manufactured home, averages between USD 700 and USD 900, making it much more affordable compared to a single-family home or an apartment. Its construction period is also significantly shorter than that of a single-family home.
Besides those three, some other subsectors can be described as residentially related, such as residential vehicles, marinas, residential mortgages, and homebuilders.
Demographical Drivers
The first topic to understand is demographical drives such as working from home (WFH), migration, and household formation.
WFH Impact
Since COVID-19, the world is reshaping how and where people work. Working from Home (WFH) has become a new constant in the USA. Among college graduates, 16.4% work entirely from home, 41.7% follow a hybrid model, and 41.9% work fully on site. Before the pandemic, nearly 85% of workers were based in offices. This significant shift has driven people to move out of major capitals, especially toward cheaper and warmer cities.
Where are people moving to?
Net Domestic Migration
The region with the greatest positive flow of people in recent years was the Sunbelt region. In 2022, Florida and Texas were the greatest examples, with more than 320.000 and 230.000 net people moving in, respectively. On the other hand, California and New York (state) had more than 300.000 people net move out.
Household formations
The second demographic factor that influences the real estate market is household formation, which is the main indicator of long-term demand. The American birth rate has been falling in recent decades, as has been the case in most developed countries. Even so, the number of households headed by 25-34 year-olds grew by 300,000 per year between 2016 and 2021, a sharp increase compared to the average annual growth of just 45,000 households between 2011 and 2016. This difference of 260,000 additional households per year, according to the JCHS of Harvard University, represented a specific movement of reversion to the historical mean. Over the long term, slower population growth could mean that future household growth will rely more on less stable and predictable factors such as immigration and headship rates, as well as the drivers that influence them, including changes in incomes and housing affordability
States policies
Rent Control
Another important topic in the residential sector is the influence of state and city regulations, such as rent controls. Some states and municipalities, like California and New York City, have adopted interventionist policies. In California, for example, statewide rent increases are currently limited to 5% plus the change in the CPI, capped at a maximum total increase of 10%, in addition to city-specific laws. Since COVID, these policies have gained more attention, and new states, such as Florida, are discussing adopting similar measures. There has even been initial speculation about the possibility of a national rent control policy. Although most states do not have any statewide policy on this issue, rent control has already become a significant driver in the market due to its impact on two of the largest markets, California and New York City, and the fact that others are considering implementing it as well.
Property taxes
In fiscal year 2020, property taxes made up 32.2% of total state and local tax collections in the United States, representing the largest source of tax revenue. At the local level, property taxes were even more significant, accounting for 72.2% of total collections. Beyond property taxes, corporate tax rates also vary considerably across states. California and several Northeastern states currently have a combined federal and state corporate tax rate close to 30%, while Texas stands at 21% and Florida at 25%. Each state and county strikes a balance between attracting new businesses and maximizing tax collection. States in the Sunbelt, many of which have among the lowest tax burdens, have leveraged this advantage to drive business expansion—a factor that in turn fuels growth in the residential real estate market.
Operating Expenses Breakdown
Jobs, Income and Savings
Social Benefits and Personal Savings
In 2019, total government expenditures were under 300 billion USD. After COVID, however, the US government spent a record amount on welfare and social services, including financial assistance for food, housing, and other benefits. These expenditures increased 3.4 times, reaching nearly 1 trillion USD. At the same time, personal savings also rose by more than 1.5 times in 2020, driven by heightened uncertainty and apprehension during the pandemic.
Income and Unemployment
The American job market reflects much of the overall economy. After the peak of layoffs during COVID, jobs returned at a rapid pace, and by the end of 2022 the unemployment rate had fallen to 3%, the lowest level since the 1970s. Income from both employment and social benefits increased the availability of money for Americans, which meant that even as savings grew, spending also rose.
Rents and Vacancy
As previously mentioned, the main component of the US CPI (inflation index) is shelter, which represents the average of current and equivalent rents and accounts for 32% of the total index. Historically, rents in the United States have grown by less than 4% on average. However, during COVID, as working from home became widespread, people began seeking larger spaces in areas beyond proximity to their offices, leading to increased investment in housing. In 2021 and 2022, rents rose by more than 24%, while vacancy rates dropped to 5.6%. For 2023, rents are expected to stabilize and return closer to the historical average growth rate.
Rent-to-income
Even with the sharp increase in rents, total income has helped offset the impact on the rent-to-income ratio. On a national level, this metric is currently close to the historical average of 25%. This suggests that there should not be significant short-term stress in rental levels, as long as American income continues to support it. However, it is important to note that each region has its own dynamics; for instance, New York City has one of the highest rent-to-income ratios in the country.
Housing Market
Home sales
In this scenario, people not only had disposable income but also benefited from historically low debt costs. The US 10-year Treasury bond was yielding below 1%, while mortgage rates were around 3%. As a result, those seeking new homes during COVID had both liquidity and favorable financing conditions—a perfect storm for the housing market. Between 2020 and 2022, housing prices surged by 40%, mirroring the sharp increase in rents mentioned earlier.
Inventory
Another factor explaining housing prices is the current inventory situation. The United States has a total housing inventory of more than 140 million units, but with a population of over 330 million people, the average occupancy is nearly 2.5 people per unit. While the number of new households continues to grow, new supply has not kept pace, leading to an estimated housing shortage of more than five million units, according to Fannie Mae.
This shortage does not appear likely to ease in the coming quarters. Before 2008, housing starts reached record levels, fueling a highly speculative and overheated market. After the housing bubble burst, however, new supply collapsed. Since then, housing starts have gradually recovered, but in today’s environment they are beginning to cool again, even though a significant pipeline of supply is set to be delivered soon. In particular, cities such as Phoenix, Denver, Charlotte, and Nashville are expected to see a substantial increase in supply of 3%–5% over the next two years—an alert sign for the Sunbelt markets.
Pending Home Sales
In order to anticipate market movements a few weeks ahead, a useful indicator for predicting home sales is the pending home sales index. This metric tracks signed real estate contracts for existing single-family homes, condos, and co-ops that have not yet closed, making it a leading indicator for existing home sales. Data shows that in 2022, pending home sales experienced the steepest decline in the last decade. The main variables driving home sales trends are housing prices, stock availability, and the cost of financing—commonly referred to as mortgages.
Spread Mortages vs Treasury
The variation between 30-year mortgage rates and 10-year Treasury yields is clear, as mortgage rates are directly influenced by Treasury rates, which serve as the benchmark for determining loan costs. For more than 20 years—aside from a temporary break during the 2007–2008 crisis, which resumed by 2009—the American market benefited from a favorable environment for new deals, largely due to the historically low cost of capital.
However, since 2021 the scenario has shifted. The lingering effects of the pandemic, combined with temporary deglobalization pressures from the war in Ukraine, sanctions in Europe and the USA, and China’s lockdown policies, have contributed to a period of global monetary tightening. In the US, inflation broke historical records, climbing above 7% per year compared to the Federal Reserve’s 2% target. In response, the Fed initiated an ongoing cycle of interest rate hikes, which pushed the 10-year Treasury yield above 4.2%, ending 2022 at 3.88%.
Mortgage rates have been directly affected by this movement, though in a non-linear way due to residential market-specific risk factors. The spread between 30-year mortgage rates and 10-year Treasuries widened sharply, with mortgage rates rising to 7% in 2022. This represented a spread of 3.23% compared to the historical average of 1.73%—an even higher differential than in 2008.
As a result, homeowners who had locked in mortgages below 4% are disincentivized from prepaying their loans or selling their homes, since purchasing another property would require taking out a new mortgage at significantly higher rates. Consequently, both home sales volumes and mortgage applications dropped sharply. According to the MBA index, mortgage applications fell by 77% compared to the end of 2020.
Affordability Issue
As a conclusion to the analysis, we arrive at the concept of affordability, which measures how accessible housing is by considering the relationship between median home prices, median income, and mortgage rates—in other words, the combined effect of all the factors discussed above. Current affordability is at its lowest level in more than 20 years, down 33% compared to the recent peak at the end of 2020. In summary, the volume of real estate transactions is expected to remain low, with limited prepayment activity, until these key indicators stabilize.
2023 vs 2008
There are several differences and only a few similarities between the subprime crisis of 2008 and the current situation. The key distinction lies in the availability of income to service debt. Although mortgage rates are currently well above average, the overall mortgage volume has been declining, and most existing mortgages were contracted at lower rates of around 4%. As a result, mortgage debt service accounts for only about 4% of people’s available income. This indicates that, unlike in 2008, the market today is not experiencing a period of excessive housing speculation.
Public vs Private
Before finalizing, it is important to complement the analysis with a distinction between the private and public markets, focusing specifically on Residential REITs, which are among the largest institutional homeowners in the United States. Corporations currently own approximately 10%–15% of all US homes. Within Residential REITs, the main subsectors are Apartments, Single-Family Houses, and Manufactured Homes, with Apartments being the largest segment.
At the end of 2022, REITs were trading at an implied cap rate close to 6%, while nominal cap rates in the private market were still below 5%. As shown in the chart, REIT cap rates tend to be far more volatile, adjusting sharply and quickly to shifts in market conditions.
In addition, there is a significant deviation from the historical average spread between public and private cap rates. The spread reached two standard deviations above the historical norm, indicating that a reversal is likely in the coming quarters. This should translate into both a catch-up movement in the private market and an adjustment in the public market, ultimately bringing the gap between them closer in line with historical patterns.
Takeaways
-
Working from home in the US has become a structural trend and is expected to remain a long-term practice.
-
National migration flows toward regions such as the Sunbelt should also continue, though at a slower pace than in recent quarters. With significant new housing supply expected to be delivered in key migration cities in 2023 and 2024, a balancing effect should occur: prices are unlikely to rise sharply due to strong demand, but also unlikely to fall steeply thanks to absorption of the new supply.
-
Rent levels remain supported by average income levels, even after recent years of increases. A modest rise in average rents is expected in 2023.
-
By contrast, there is limited room for further appreciation in house prices. The more likely scenario is a decline in transaction values, primarily driven by the current high cost of capital.
-
No disruptions are expected from long-term structural factors. The market is still adjusting to new variables, but in the longer term, the growth of the American economy, rising incomes, and the persistent housing shortage will remain the key drivers of the sector’s future.
