By Andy Chen
Video version of “Rate Cuts Begin, Election Nears, U.S. Real Estate Riding High”
In April 2024, FORBES released the list of the 50 most expensive ZIP codes in the U.S., which is almost seen as a barometer for the most coveted luxury residential communities. Atherton, located near Stanford University in the heart of Silicon Valley, once again topped the list.
My real estate agent recently told me that houses in Atherton have become even more sought after, and agents are struggling due to a lack of listings. The agent mentioned that in the two weeks since the Federal Reserve's interest rate cuts, the real estate market activity has tripled compared to the past two years combined. Keep in mind that the average home price in Atherton is currently around $10 million, which is extremely expensive.
What I am pondering is why are top-tier luxury homes the first to recover. When will this momentum spread to the broader real estate market? Looking at the history of U.S. real estate, when did luxury homes become a financial barometer and a tool to hedge against inflation? And what impact will the upcoming November election have on the U.S. real estate market? This article will attempt to answer these questions.
01
The Current State of U.S. Real Estate—A Tale of Two Extremes
Rising Prices, Sluggish Transactions
in Regular Properties
According to data from the National Association of Realtors, in August, the inventory of existing homes in the U.S. stood at 1.35 million units, representing a 4.2-month supply (Figure 1). Both of these indicators saw significant increases compared to February 2024. In August 2024, U.S. existing home sales fell by 2.5% from the previous month and by 4.2% year-over-year, both figures falling short of market expectations. The annualized sales rate for existing homes was 3.86 million units (Figure 2), marking a new low for the year, and the contrast with the hot luxury home market is stark.
Figure 1. U.S. existing home inventory (last year)
Figure 2. Annualized sales of existing homes in the United States
While U.S. housing inventory is rising and sales are declining, home prices have once again entered an upward trend since February 2024. The median price of existing homes increased from $379,000 at the beginning of the year to $423,000 in July, reflecting a 11.6% rise in just half a year (Figure 3). It's important to note that this is the national average home price, making this a truly remarkable increase.
Figure 3. Existing Home Prices in the U.S.
Why does the U.S. real estate market have high prices but low sales? The reason is simple: the lock-in effect of interest rates. In the U.S., when buying a house, you can choose between a fixed or variable interest rate. Most consumers opt for a fixed rate, and once it's locked in, fluctuations in mortgage rates no longer affect you. For a detailed analysis of interest rate lock-ins, you can refer to my articles "U.S. Residential Real Estate: The Best Asset Allocation of 2024" and "Research on the Investment Value of U.S. Real Estate." Currently, the 30-year mortgage rate in the U.S. is 6.12%, but only 16.3% of existing mortgages have an interest rate higher than 6%. This is why the Federal Reserve's interest rate cuts have not yet had a substantial impact on the broader real estate market (Figure 4).
Figure 4. Distribution of existing mortgage rates in the United States
Due to differences in historical circumstances, central bank policies, and societal expectations, the proportion of people choosing fixed interest rates varies significantly across countries. According to IMF statistics, over 95% of mortgages in the U.S., Mexico, and France are fixed-rate, while in Australia and Portugal, the proportion is less than 25%. In Japan and South Korea, it ranges between 30-40%. In China, homebuyers can also choose between fixed or variable interest rates, but there is currently no publicly available data on the distribution.
Figure 5. Fixed-rate mortgage loans vary widely across countries
What everyone is most concerned about is: to what extent must the Federal Reserve cut interest rates to have a substantial impact on the U.S. real estate market? The calculations are as follows: when the 30-year mortgage rate drops to 5%, it will affect 25.6% of existing mortgages; when the 30-year mortgage rate drops to 4%, it will impact 40.5% of existing mortgages. At that point, we believe the rate cuts will begin to have a substantial impact on the market. If mortgage rates continue to fall to 3%, it will affect 74.2% of existing mortgages. Currently, 25.8% of existing mortgages have rates below 3%, so mortgage rates would need to drop below 3% to impact those loans.
Due to the lock-in effect in the market (where 83.7% of mortgages are below 6%), consumers are reluctant to take out loans at such high interest rates. Similarly, because rates remain elevated, new home construction has not seen a rebound either (Figure 6). This is why the U.S. housing market is experiencing sluggish transaction volumes.
Figure 6. US housing starts and building permits
Why are housing prices rising? It's due to the Federal Reserve's anticipated interest rate cuts! The market is speculating only on the timing and extent of the rate cuts. As interest rates continue to fall, previously locked-in properties will enter the unlocked phase, new home supply will increase, and lower interest rates will reignite transactions.
A survey by The Conference Board revealed that the percentage of American consumers planning to buy a home in the next six months (from October 2024 to March 2025) has jumped to its highest level since August 2023. Builders expect home sales to increase over the next six months.
In response to this situation, wealthy individuals are quickly purchasing homes, locking in current prices, and benefiting from appreciation. Meanwhile, ordinary people are waiting for the interest rate cuts, only planning to act when rates have sufficiently dropped. This is why the U.S. housing market is experiencing a stark contrast between the luxury and regular home markets.
Surge in Prices for Luxury Homes
in Atherton
If you only look at the average transaction prices on real estate websites, you won’t fully grasp how sharply home prices have risen because there are so few listings. As of September 30, 2024, there were only 10 homes for sale in Atherton on the real estate platform Zillow. The average transaction price was $10.53 million, with a median price of $7.9 million.
Figure 7. Atherton house price trends
In the past, houses here would sell in 40 days, but in 2024, the median selling time dropped to 15 days, and recently, the selling time has become even shorter.
Figure 8. Atherton house transaction time
The conclusion is simple: wealthy individuals act quickly when they see signals or trends of interest rate cuts, which is why rate cuts have the greatest impact on luxury homes, as I’ve observed in Silicon Valley. The middle class waits for rates to fully drop before making a move, as they need to calculate their monthly mortgage payments. However, by that time, housing prices may have already increased, so rate cuts have a secondary impact on them. The lower-income population tends to wait until the market stabilizes, but by then, housing prices are usually very high. This is how the world operates. I hope these observations offer some insights, at least teaching you to view the world and make decisions like the wealthy.
01
The History of U.S. Real Estate
Figure 9 shows the housing price trends in 14 wealthy countries since 1870. You can clearly see that home prices have steadily increased since 1950, growing from an inconspicuous asset class into the world's largest asset category. In 2008, home prices experienced a brief decline, with global prices dropping by 6% from 2007 to 2009. However, after 2010, they quickly surpassed their previous peak. In 2022, central banks around the world raised interest rates, reigniting concerns about falling home prices. Yet, the market only saw a 5.6% decline, and now real estate has begun a new round of growth. Has real estate surpassed all cycles? Has it defied all economic rules?
Figure 9. Housing price trends in 14 developed countries
We still need to return to the basic fundamentals of supply and demand to discuss this.
Real Estate Supply is Becoming Tighter
After World War II, developed countries, including the United States, introduced a series of land use and environmental regulations. These rules and regulations have objectively restricted the supply of infrastructure, severely limiting urban expansion. As a result, from New York to London, the growth of metropolitan areas in developed countries started to slow down from the 1960s. More and more restrictions have been imposed on the construction industry, leading to a decline in its average productivity (Figure 10). At the same time, housing prices began an unstoppable rise, especially evident after the 1960s.
Even today, getting approval for new homes in the U.S. has become increasingly complicated. In the Bay Area, where our Carmel project is located, only 7,000 new homes were approved for construction in 2023. Meanwhile, California's population grew by 67,000 people in 2023, not counting illegal immigrants. Therefore, the increasing scarcity of housing is also a key reason for rising home prices.
Figure 10. Labor productivity in the construction industry is getting lower and lower
The logic behind this is easy to understand. Neither local governments nor existing homeowners want more houses to be built in their area. The more houses that are built, the lower the property prices become. Lower property prices mean lower property tax revenue. Since 70% of U.S. local government revenue comes from property taxes, followed by sales taxes and income taxes, they prefer to limit new construction. As building homes became increasingly difficult after the 1960s, U.S. home prices, which had been falling, began to rise instead.
Increasing Demand for Real Estate
The most significant demand-side driver for real estate is population growth. After World War II, developed countries experienced a population boom, commonly referred to as the post-war baby boom (Figure 11). From 1945 to 1959, the U.S. birth rate surged, which fueled the increase in real estate demand after the 1970s.
The second factor is immigration. Developed countries, with their high wages, generous welfare systems, and abundant opportunities, attract the world's elite. The foreign-born population in wealthy countries grows at an annual rate of 4%, far exceeding the birth rate in these nations. Immigrants consistently drive up both rent and housing prices. A study by Rosa Sanchis-Guarner from the University of Barcelona found that for every 1% increase in immigration rates, the average home price rises by 3.3%. California, being a Democratic stronghold and a hub for tech companies, has always been a magnet for high-end immigration. In my article "America’s Grand Strategy: The Overt and Covert Effects of Interest Rate Cuts," I mentioned that the increase in immigration in recent years has become so significant that it has affected hotel prices in New York.
Figure 11. America’s post-war baby boom
Therefore, the fundamental reason driving the continuous record highs in home prices in developed countries is restricted supply combined with increasing demand.
The U.S. Housing Market is No Exception
Figure 12 shows U.S. home prices adjusted for inflation, offering us more valuable insights. The basic principle remains unchanged: supply and demand are still the most crucial factors affecting U.S. real estate prices.
First, after World War I broke out in 1915, U.S. home prices declined and didn’t recover for a long time. This period included the Great Depression and World War II, during which the wealth effect of real estate had yet to manifest, similar to other developed nations.
Second, from 1945 to 1968, both supply and demand were strong. After World War II, millions of young soldiers returned home, leading to a surge in housing demand. U.S. home prices quickly recovered to pre-1915 levels. Due to the country's vast production capacity at the time, this demand was swiftly met by a large supply of homes, preventing a housing price boom. From 1953 to 1968, real home prices gradually declined. Meanwhile, increasing environmental regulations, land use rules, and approval restrictions began to limit the supply of real estate, setting the stage for significant price increases.
Figure 12. US inflation-adjusted house price trends
Third, from 1970 to 1990, both monetary transitions and rising construction costs occurred simultaneously, leading to a rise in nominal real estate prices (Figure 13). During the 1970s and 1980s, the U.S. was in a transitional period, shifting from the gold standard to a fiat currency system. Both the Federal Reserve and the U.S. government were navigating this shift without a clear policy framework. The U.S. entered a period of stagflation in the 1970s, and nominal home prices began to rise significantly. At the same time, the costs associated with new home construction were also increasing. In the 1980s, Paul Volcker’s aggressive interest rate hikes curbed inflation, and the introduction of the 401(k) plan attracted a large amount of capital into the stock market. This led to a decline in real home prices until after 1985, when real prices began to rise again.
Figure 13. US nominal housing prices have risen sharply since the 1970s and 1980s
Fourth, after the 1990s, U.S. real estate supply became more restricted, demand continued to rise, and the financialization of real estate strengthened due to an influx of capital.
The decline in home prices from 1990 to 1997 coincided with a massive surge in the U.S. stock market, as capital flowed from the real estate market into the stock market. After the dot-com bubble burst in 2000, home prices entered an upward trend, continuing to rise until just before the subprime mortgage crisis in 2007. The subsequent story is more familiar to everyone: following the subprime crisis, the Federal Reserve continuously injected liquidity to rescue the market. At the same time, developers became more conservative, significantly reducing new home construction. Even today, the number of new homes being built in the U.S. has not reached the pre-2007 peak (Figure 14).
Figure 14. U.S. housing starts
However, the natural population growth in the U.S., the natural aging of houses, and the housing demand brought by new immigrants have not decreased. In 2008, the U.S. population was 304 million, and by 2024 it has grown to 336 million, yet new houses are not being built fast enough. The first result of this is that the real estate inventory rate has hit a record low (Figure 15). In such a situation, it would be surprising if housing prices didn’t rise!
Figure 15. U.S. Existing Home Inventory
At the same time, due to the Federal Reserve’s massive liquidity injection in 2020, U.S. wages have risen, and the labor shortage in the construction industry has persisted. Additionally, land prices have risen along with inflation. These factors have caused the cost of building new homes to continuously increase (Figure 16), further driving up the prices of new homes.
Figure 16. New Home Construction Costs in the United States
That's why, since 2021, I have repeatedly published articles urging investment in U.S. real estate. You can refer to articles such as "Will U.S. Home Prices Continue to Rise?" (2021), "Will the U.S. Real Estate Market Remain Hot in 2022?", "Is U.S. Real Estate Still Worth Investing in for 2023?", and "U.S. Residential Real Estate: The Best Asset Allocation for 2024." As you can see, our decision-making logic has always been consistent, clear, and transparent. It's not that we made a lucky guess about the housing price trend, but rather, the fundamentals are simple: supply, demand, and interest rates determine prices and transaction volumes.
When the pandemic hit in 2020, the Federal Reserve once again printed a large amount of money. As a financial reservoir, real estate prices soared—both nominal and real prices saw significant jumps. It was precisely because of this reservoir effect that the Fed's massive liquidity injection did not immediately trigger large-scale inflation. It wasn't until the pandemic disrupted production and logistics, coupled with direct cash payments to the public, that inflation finally surged.
Everything has two sides. Setting aside moral considerations, let's objectively assess the effects of this round of large-scale monetary easing. In Q2 2024, the wealth of the richest 1% of American households reached $46.7 trillion, an increase of $16.3 trillion from $30.4 trillion in Q1 2020, a 54% increase (Figure 17).
Figure 17. The richest 1% in the United States
As of Q2 2024, the top 1% of households held 30.2% of the nation's wealth (with the top 0.1% holding 13.5% and the next 0.9% holding 16.7%). The next 9% of households held 36.5% of the wealth, meaning that the top 10% of people owned 66.7% of U.S. wealth (Figure 18). The direct increase in wealth among the rich has further fueled the luxury housing market (with the bottom 50% of households holding only 2.5% of the wealth and the middle 40% holding 30.8%). This is the current state of the U.S. real estate market.
Figure 18. Wealth distribution in the United States as of the first quarter of 2024
Learning from the past to understand the present: reviewing history helps us see where U.S. policy is headed next.
03
The Impact of Interest Rate Cuts and the Election on U.S. Real Estate
We have previously analyzed in detail the policy platforms of Trump and Harris. Today, we'll focus on the potential impact of their policies on interest rates and real estate.
The Impact of a Trump Victory on Real Estate – Accelerated Recovery!
We believe that if Trump wins the election, his tax cut policies will heat up market expectations for interest rate cuts. The logic is simple: tax cuts will directly increase the federal debt level. An analysis report by the U.S. Committee for a Responsible Federal Budget shows that Trump's economic plan is expected to increase federal debt by $7.5 trillion, which is double that of Harris's plan. With rising debt levels, the Federal Reserve would have to consider reducing interest payments, potentially leading to larger-than-expected interest rate cuts.
Let’s not forget that tax cuts will directly increase the income of both businesses and individuals. With higher incomes and lower interest rates, a boom in U.S. real estate will arrive faster, similar to the mini-boom from 2000 to 2007. The U.S. economy will experience a period of high prosperity.
The Impact of a Harris Victory on Real Estate – Steady Recovery!
Harris also proposes tax cuts. The only difference from Trump is that Harris's plan focuses on tax cuts for families earning less than $400,000, which is expected to increase federal debt by $4 trillion, not much less than Trump's plan. However, Harris promises to raise the corporate tax rate (from 21% to 28%), which could generate $1 trillion in revenue, partially offsetting the cost of the tax cuts.
The most significant impact of Harris's policy on U.S. real estate is her plan to build 3 million affordable housing units. In 2023, new home supply in the U.S. was 1.42 million units. Spreading 3 million units over four years, with 750,000 units per year, accounts for half of the new home supply in 2023—a considerable increase.
Why is Harris confident enough to increase supply on such a large scale? We believe there are two reasons: first, the U.S. is facing a housing supply shortage, with the pandemic and high interest rates significantly suppressing supply. According to estimates from Caitong Securities, even if the number of new homes in the U.S. grows by 20% annually from the 2023 baseline, and household formation continues at the average rate from 2019-2023, it will still take more than three years to close the current supply-demand gap of 7.24 million homes (Figure 19). Data from the National Association of Realtors shows that total existing home sales in the U.S. in 2023 were 4.09 million units, the lowest level since 1995.
Figure 19. The current cumulative supply gap of new homes in the United States is 7.24 million units
The second factor is the continued rise in immigration. Without a doubt, if Harris wins, U.S. immigration levels will be at least as high as they were during Biden’s presidency (Figure 20). These new immigrants, both legal and illegal, are different from newborns in that they immediately need housing, which directly impacts real estate prices.
The impact of immigration on the U.S. goes far beyond housing prices. According to Elon Musk, if Trump loses this election, it could be the last one. This is because Biden and Harris are actively flying in waves of illegal immigrants directly to swing states, including Pennsylvania, Ohio, Wisconsin, and Arizona. The vote margin between the two parties in these swing states is often as narrow as 20,000 votes. The Democratic Party is working to make many of these illegal immigrants U.S. citizens, around 500,000 people per year. Over four years, this could result in 2 million new legal voters. Once these individuals are settled in swing states, these states will no longer be contested, and the Democratic Party will secure control, much like the Liberal Democratic Party in Japan.
Figure 20. The number of immigrants has surged since the Biden administration took office
Back to real estate: if Harris takes office, with an increase in affordable housing supply, continued growth in immigration, and a steady pace of interest rate cuts, the U.S. real estate market will experience moderate growth, and the strong demand for high-end properties will remain unaffected. Therefore, it is still a good time to invest in U.S. real estate.
Housing Boom Will Suppress Inflation
Currently, the U.S. real estate market is characterized by high prices and low volume. Once supply increases and the housing market truly prospers, it will help suppress inflation. This can be analyzed from two perspectives.
First, from a microeconomic perspective, rent is the most important factor influencing the U.S. Consumer Price Index (CPI), accounting for as much as 36%. It consists of two parts: direct rent and owners' equivalent rent, with the latter making up 70% of the total. Historically, as long as there is sufficient housing supply, there has been no reason for residential rents to rise significantly (Figure 21). Even before 2008, when U.S. home prices surged, rents did not follow suit. From the chart, it is clear that during the period of sustained nominal home price growth from 1993 to 2008, U.S. residential rents remained low, with only a brief uptick between 2001 and 2002. Similarly, rents remained low from 2008 until just before the pandemic in 2020.
The only abnormal surge occurred after 2022, and its root cause was not rising home prices but the disruption in housing supply due to the pandemic. The resulting housing shortage led to a spike in rents. Once housing supply is restored, rents will stabilize at reasonable levels and will no longer be a driving force behind inflation. The current situation is an exception in history.
Figure 21. US House Rent and House Price Index
Second, from a macroeconomic perspective, a real estate boom will act as a financial reservoir, causing capital to flow into real estate, thereby preventing a surge in consumer spending. In 2008, China implemented a 4 trillion yuan stimulus package, a significant monetary injection equivalent to 12.7% of China's GDP that year. However, China's CPI in 2009 was -0.7%, and the everyday life of ordinary people remained unchanged. The only significant change was the rise in housing prices, as the real estate market acted as a reservoir for this excess capital. Historically, when the real estate market thrives, inflation tends to remain low, and there are no known counterexamples.
04
Conclusion
The U.S. real estate market is currently experiencing two extremes. The luxury housing market is booming, with demand outstripping supply, and both prices and transaction volumes are rising. On the other hand, regular housing continues to see high prices but low sales, with rising inventory as the market waits for further interest rate reductions.
The new home market has seen declining inventory over the past decade due to conservative and slow construction, rising building costs, and increasing labor expenses. This has led to rising new home prices and sluggish transaction volumes. Meanwhile, the unique interest rate lock-in effect in the U.S. has frozen the secondary housing market. Currently, 33.8% of existing mortgages have an interest rate between 3% and 3.99%, and 25.8% have rates below 3%. Therefore, the 30-year mortgage rate would need to drop to 4% or lower to have a significant impact on the real estate market, which is why the housing market is still largely characterized by high prices but low transaction volumes.
From a historical perspective, housing prices in developed countries, especially in the U.S., began to rise rapidly after the 1960s, during the U.S. stagflation period, as a way to offset high inflation. Prices skyrocketed after the 1990s, primarily due to an imbalance between supply and demand. On one hand, population growth and increased immigration boosted demand for real estate. On the other hand, vested interests and rising approval, environmental, and construction costs hindered new housing supply. Local governments, motivated by property taxes, also contributed to rising home prices. This imbalance has led to continuous price increases in developed countries. After 2000, real estate's financialization became more pronounced.
The sharp increase in the luxury housing market can also be attributed to the wealth effect of the stock market and the concentration of wealth. Currently, the top 1% of U.S. households hold 30.2% of the nation's wealth (with the top 0.1% holding 13.5%), and this direct increase in wealth among the wealthy has fueled the luxury housing market.
Interest rate cuts are a key short-term driver of rising home prices. Regardless of whether the Democrats or Republicans take office, the U.S. is already on a path toward interest rate cuts. However, if the Republicans win, rate cuts may come faster, and combined with Trump's tax cut policies, the real estate recovery will accelerate. If the Democrats win, the pace of rate cuts will remain unchanged, with an increase in affordable housing supply (3 million units), leading to a steady real estate recovery.
Contrary to popular belief about inflation, I believe that a housing boom will suppress inflation. Rent is the most important factor affecting the U.S. CPI, and once the housing supply shortage is addressed, rent will return to normal levels. As the real estate market prospers, it will act as a financial reservoir, channeling social capital and consumer purchasing power into housing, which will ultimately help stabilize inflation in the long term.
Spring is in the air, and those in the know are already positioning themselves in real estate!
Pessimism is a form of foresight, but optimism requires wisdom!
翻译自2024年10月15日文章《降息开启，大选临近，美国地产顺风满帆》
About the Author:
Andy Chen, graduated from the University of Chicago with a bachelor's degree in Economics and Statistics (Honors), with more than 24 years of experience in global financial industry. He founded DL Securities and DL Family Office successively , and was also the Responsible Officer of the licenses Type 1, 4, and 6 issued by HKSFC. He is now the Chairman of the Board, Executive Director and CEO of DL Holdings Group. Mr. Chen also serves as the vice president of Hong Kong Limited Partnership Fund Association.
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