Housing affordability could be the next post-pandemic crisis  Global house prices are rising at the fastest pace in 40 years, tracking 13% above pre-pandemic levels as of 2Q21.

 US housing prices were on a tear in 1H21, with Home Price Appreciation (HPA) above 14% from a year ago as of April/May while CoreLogic reported the highest YoY HPA at 17.2%.

 A 1% move down in mortgage rates is associated with a 10% increase in home sales. With 30-year mortgage rates down 59bp since March 2020, home sales have risen by 12%.

 Housing demand trends appear to be slowing this quarter as housing affordability is now at its most stretched since 2008, with increased focus on growing inequities and the impact upon the lowest-paid sectors of the economy.

 COVID-19 has brought on a bigger crisis for renters, who tend to have lower incomes than homeowners and who were more likely than mortgage holders to have lost their jobs and experienced a larger decline in labor income.

 Structural factors support the housing market with inventory still lower than a year ago and demographics supportive of sustaining higher housing starts.

 Our Mortgage-Backed Securities Strategy team anticipates 15% growth in home prices in 2021 followed by 7% in 2022, before slowing down to 5% in 2023 and 3% in the years ahead.

 Fears of a housing bubble and comparisons to the housing price run-up before the Global Financial Crisis (GFC) are overblown due to improved lending standards.

 House price gains add some upside pressure to inflation but links to housing services are muted. It is debatable whether shifts in housing demand will cause a one-off price change or a persistent change in inflation rates.

 Inflation expectations do not yet suggest persistent changes, but if owners’ equivalent rent (OER) is truly lagged, then inflation can be more real than what is in the headlines.

 COVID-19 has brought on a deeper crisis for renters with respect to housing affordability and is highlighting the need for wage growth (ex-stimulus) to address eroding affordability.

 Lending standards tightened post-GFC and availability of mortgage credit dropped during the pandemic, but we think it does not reflect the full refinance boom.

 The take-up for mortgage forbearance was not massive and nearly 77% of forborne loans have exited forbearance with less than 9% seriously delinquent, while active mortgage forbearance is down to 3.9% from a peak of 9.0%.

 Lower rates have increased the availability of cheaper mortgages, but the ratio of US home prices to median annual wages is back to pre-GFC levels.

 Recent announcements from the Federal Housing Administration (FHA), Federal Housing Finance Agency (FHFA) and Consumer Financial Protection Bureau (CFPB) likely set the stage for forbearance to end in the near future.

 Mortgage origination and servicing have shifted from banks to non-banks with 56% of servicing now outside the banking system.

 The fallout to the Commercial Real Estate (CRE) market is so far better than initially feared with resilience for multifamily lower-quality properties (class B/C) given the growing concerns about housing affordability.

 We remain constructive on homebuilding stocks and see relative opportunities across consumer finance verticals, supporting mortgage insurance companies versus the rest of the sector but remain Neutral on mortgages versus rates.