The US real estate market is not optimistic

The Federal Reserve has recently strengthened its expectation of not cutting interest rates for March this year, and loan costs have continued to rise, doubling the pressure on the US real estate market.

The minutes of the Federal Reserve's January monetary policy meeting indicate that the federal funds rate may have reached its peak, but there is a risk of premature relaxation of monetary policy stance. Officials believe that significant progress has been made in the recent return of inflation rates to target levels. But some officials also point out that this only reflects a temporary improvement, and once consumer spending exceeds expectations, borrowing costs decrease, or the financial environment is too loose, the trend of slowing inflation may stop or even reverse.

From this perspective, it appears that the Federal Reserve is unlikely to initiate interest rate cuts as previously expected in March. In fact, after the Federal Reserve suspended interest rate hikes last year, the market was highly concerned about when the rate cuts would start, but Federal Reserve officials have stated on multiple occasions that they are not in a hurry to take action.

The US mortgage interest rate briefly broke through 8% in October last year, reaching a 20-year high. Since the fourth quarter of last year, the market expects the current interest rate hike cycle to come to an end, and interest rates have started to decline accordingly. But as data is gradually released and market expectations change, investors expect the Federal Reserve to postpone the start of interest rate cuts, and loan rates will turn around and rise.

The US Mortgage News reported that the average interest rate on 30-year fixed mortgage loans has further climbed to 7.16%, the highest in two months. Due to high interest rates, loan costs remain high.

Some economists say that high mortgage interest rates have greatly weakened the affordability of many American households. The long-term demand for buying a house is determined by the employment situation, but the timing of buying a house depends on the mortgage interest rate and the inventory of unsold properties. Potential homebuyers are quite sensitive to changes in interest rates. Due to limited housing supply, higher interest rates and housing prices have increased the affordability of purchasing a house.

Due to the relatively harsh housing environment, the number of first-time loan buyers has decreased. The proportion of new homebuyers in January dropped to 28%, lower than 29% in December last year and 31% in January last year, indicating that many Americans are currently facing significant pressure due to their declining affordability.

The US commercial real estate market has also been consistently sluggish, with vacancy rates rising and related transaction volumes showing a significant decline. Data shows that as of the end of last year, about one-fifth of office buildings in the United States were vacant, with even big cities like Los Angeles and Houston having a vacancy rate of 25%.

According to an article, US commercial real estate prices are experiencing the most severe drop in half a century, with an 11% drop since the Federal Reserve raised interest rates in March 2022. According to real estate firm Real Capital Analytics, property prices for office buildings in the United States have fallen by about 20% from their peak.

With the decline in commercial real estate prices in the United States, risks are emerging. According to an MBA report, $441 billion of commercial real estate debt held by banks is due this year, and the weakness of commercial real estate is putting enormous pressure on the US banking system.

Bloomberg reported that a report on the fragility of the US banking industry released in December last year showed that if the default rate of commercial real estate loans reached 10%, it would result in an additional $80 billion in banking losses.

The US real estate market is facing a dual blow from the demand market and interest rate market, which may become the biggest potential crisis in the United States for the next two years. This crisis may surpass the impact of the 2008 financial recession and bring enormous pressure to the overall economic growth of the United States.