US housing market after COVID – crisis or new normal?

Is the current housing market the sign of a new crisis – or a sign of a new normal in a post-pandemic environment?

Reinsurance broker Lockton Re answered this question via new analysis on the state of US mortgage credit risk, delving into the complexities of the current housing market, characterized by limited supply, robust demand, and diminishing affordability in the aftermath of the pandemic.

The study, titled “Unpacking the Post Pandemic Housing Market: Crisis Incoming or the New Normal,” provides an examination of the market’s fluctuations following the COVID-19 outbreak. It highlights a significant milestone in 2021 when US housing inventory plunged to its lowest in over five decades.

According to the report, the ongoing market conditions and interest rate environment suggest a growing dependence on the construction of new homes to satisfy market demand.

The analysis also pointed out a stark contrast in economic indicators since 2015, noting a roughly 45% rise in median household income against a 140% surge in monthly mortgage payments. This disparity suggests that housing expenses have far exceeded wage growth – by more than 300%.

Lockton Re’s report forecasts that housing supply will remain constrained until there is a decrease in interest rates. However, it anticipates a rebound to pre-pandemic levels of market activity as existing homeowners eventually decide to sell, influenced by more favorable rates.

In the short term, this scenario may prompt reinsurers to explore diversification into other lines of credit. Over the longer term, however, growth is expected in this sector.

Sean Hannah, co-head of mortgage and credit at Lockton Re, shared her insights on the current market challenges.

“Home price inflation coupled with rate hikes have finally pushed buyers past the brink of affordability. Additionally, existing homeowners are reluctant to give up their favorable interest rates to introduce new supply into the market,” Hannah said.

She explained that the restriction of both supply and demand is keeping the market relatively balanced and should bode well for current holders of mortgage credit risk. However, caution is urged for those looking to grow their portfolios.

Joe Koebele, co-head of mortgage and credit at Lockton Re, also commented on the strategic response of insurers and reinsurers to the current market dynamics.

“Despite the current environment many re/insurers are still targeting credit as a business segment with opportunity for growth,” Koebele said. “We are seeing the anticipated reductions in new mortgage credit risk transfer issuance push more re/insurers to look to diversify their business into other lines of credit, such as bank credit risk transfer and significant risk transfer transactions.”

This reflects a broader strategy among re/insurers to navigate the challenging landscape and identify growth opportunities within the credit segment.

Another report from the brokerage indicates that amid a shift towards normalcy during reinsurance renewals, the property insurance sector is expected to maintain a positive rate environment through the first half of the year.

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