The US housing recovery continues to face headwinds. Here are the key factors contributing to weakness in the sector.
1. We've had a sharp decline in housing affordability due to higher prices and higher mortgage rates. The decline in mortgage rates recently should help somewhat, but buyers remain cautious.
|Source: Deutsche Bank|
2. Banks have tightened lending standards. The important trend here is the tightening in the "nontraditional" mortgages (ignore the "subprime" component - it's not a meaningful portion of the market). If you don't fit into the traditional mortgage "box", getting a loan is now more difficult.
|Senior Loan Officer Opinion Survey on Bank Lending Practices (Federal Reserve Board)|
3. Household formations have stalled. It will be difficult to get the demand going until growth in households picks up again.
|Source: U.S. Census Bureau|
This weakness in housing is already reflected in the equity markets as shares of homebuilders underperform.
|Orange=S&P500 ETF, Blue=Homebuilder index ETF (source: Ycharts)|
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