AEI Housing Market Indicators, July 2021

Slides · Methodology

The American Enterprise Institute’s Housing Center released its monthly update to the AEI Housing Market Indicators on June 28, 2021.

• Stressed MDRs, calculated solely on the basis of loan characteristics present at origination, are highly predictive of default rates
  • This applies to both in a non-stress delinquency environment (R-squared is 96.9 percent) and in a stress delinquency environment (R-squared is 99.7 percent), even though the size and nature of the pandemic is fundamentally different from the financial crisis.
  • For agency loans originated in 2016-2019, 9.1 percent experienced an Ever 60+ days delinquencies as of April 2021. These delinquencies were more prevalent with high risk loans (defined as MDR > 14 percent).
  • If the MDR had been capped at 14 percent at origination, we estimate that around 31 percent of the above-14 percent delinquencies, and 21 percent of total delinquencies could have been avoided.
• The home price boom continues, with the national rate of Home Price Appreciation (HPA) for May 2021 coming in at 15.3 percent (preliminary), up from 6 percent in May 2020.
  • The Fed’s monetary punchbowl is fueling rampant home price appreciation.
  • Starting with June 2020, months’ supply levels started to drop precipitously across all price tiers.
  • Low mortgage rates combined with about 1 months’ supply mean that HPA will remain strong over the coming months, as also indicated by Optimal Blue data.
• Evidence from two cases studies of Palisades Park, NJ and Seattle, WA shows how modest changes to zoning can have a big impact on supply.
  • Palisades Park saw progressively more extensive two-family structures, especially duplex redevelopment. As a result, Palisades Park has added 51 percent to its housing stock since 1969 while Leonia has only added 24 percent over the same period.
  • The SF zone in Seattle contains almost three times as many units as the LRM zone. However in terms of new construction activity, the LRM zone has about twice as many new units built as the SF zone.

The AEI Housing Market Indicators provide accurate and timely metrics for the housing market. These include Mortgage Risk/Leverage (with a particular focus on agency first-time buyer volume and risk), house prices and appreciation trends, housing sales (new and existing sales whether institutionally financed, cash, and other-financed), and inventory levels. Since the housing market is influenced by many different factors, all need to be considered together to better understand market trends.