From tariffs to tightness: What’s happening in the US housing market?

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Anthony Paolone: Welcome to Research Recap on J.P. Morgan's Making Sense. My name is Anthony Paolone, co-head of U.S. Real Estate Stock Research, and I'm joined by my colleague, John Sim, head of Securitized Products Research. John, thank you so much for joining me today.

John Sim: Yeah, hi, Tony. Thanks. I'm happy to be here.

Anthony Paolone: So in today's episode, we're gonna be taking a deep dive into the complexities of the U.S. housing market in 2025. We will be examining the factors driving home prices, the impact of interest rates, and the challenges of supply and demand. We'll also delve into the potential implication of President Trump's tariffs, housing policies, and how immigration influences market dynamics. But before we get into the meat of the conversation, I just wanna provide our listeners with a quick overview of the U.S. housing market and where we stand as we wrap up Q1 here. And also, we are recording this podcast on Tuesday, April 8, 2025, and I wanna note this, because we are (laughs) in the throes of a lot of market volatility due to the rolling out of tariffs, so things can change rapidly here.

John Sim: Yeah, agreed, Tony, and the tariffs are certainly top of mind. But maybe before we really get into that, if you could give us a bit of a summary on the U.S. housing market, on a very high-level, sort of top-down, where we stand today.

Anthony Paolone: Yeah. So, first let me lay that out, 'cause it's the scale of the U.S. housing market that's interesting, and why the supply-demand picture has been so topical the last several years. So, U.S. has just over 132 million households living in about 147 million units of housing stock, or about 90% utilization of the housing inventory. Now, if we go back 10 to 15 years, this 90% number was about 87%, so utilization is up about three percentage points, which may not sound like a lot, but it means that demand has outpaced supply to the tune of about four million units. And that has had a real impact on how tight housing markets are, for both renters and buyers, and it tends to set the stage for many affordability discussions. And one point I'll make though here too is despite supply lagging, we did just come out of 2024 where we saw new supply on the rental side being very outsized, and so it isn't just across everything where supply was lagging. We did see supply on the rental housing side come in pretty meaningfully in 2024. And you did see that have a bit of a muting effect on rental rates. We estimate that market rents, nationally, didn't move much at all in 2024. But let me stop here. I'm gonna turn this over to you, John, for a picture on the for-sale housing side.

John Sim: Yeah, thanks Tony, and you really hit the nail on the head with respect to demand outpacing supply. I think that's something that's been talked about in the market quite a bit. But I'm gonna let you talk more about the demand side in a bit. I'd like to talk about affordability, mortgage rates, and a locked housing market. So broadly, when we look at affordability, we look to cost-to-income, in other words how much does it cost for your mortgage payment or your rental payment versus your income. So, for the market as a whole, cost-to-income is around 35%, which actually doesn't seem too bad. It's basically only about 1/3 out of your income. However, a lot is masked in this number as it includes both renter and homeowner income. So for example, if we dissect this and look at homeowners, their cost-to-income is actually only about 20%. That's because they've locked in a very low mortgage rate, and I'll come back to that point in a bit. But when we look at renters, who are potentially wanting to buy with their income, they would actually be, be about 55% of their income. So, current homeowners are sitting in a very, very good position. In fact, 62% of the homeowners have a mortgage rate of about 4% or lower. These borrowers are locked in, and that, and that point is really critical here, because that's another factor that's limiting supply. So not only did we under-build, but the market simply doesn't have a place for these borrowers to go. Effectively, when they want to move, that decision to move into a six-and-a-half mortgage rate will limit them, and the renters simply can't afford at these levels either. So, this obviously has implications on existing home sales. What do you think is the picture on existing home sales side right now, given where rates are?

Anthony Paolone: Yeah. It's a, it's a great question, and it does bring us up to right now, and what's on our minds as the macroeconomic picture changes. So our last forecast for existing home sales that we wrote about was about four-and-a-half million for 2025, and we haven't changed it. And, and this would be up about 10% from the roughly 4.1 million that we saw in 2024, but what we've said for a few years now is that whether it's four, or 4.1, or even 4.5, existing home sales in the four million range doesn't make a lot of sense to us over time, given the size of the country. And what we've always looked at is the long-run, historical turnover of housing. So for instance, what is the churn rate? Like, how much do people sell, or how often do they move each year? And we've looked at that over decades, and if we take that rate and just apply it to the existing stock of owner-occupied homes in the country right now, it would suggest that we should be running about 5.8 million existing home sales, so much, much higher than where we are. Now, we know why the level of home sales is depressed. You just laid that out with this lock-in effect. But the question becomes what happens now, as tariffs create this macroeconomic risk? For us, we think it's hard to peg, because on the one hand, you have consumers that could potentially face some real challenges in a potential recession, and that would suggest that home sales could stay depressed or even come down a bit. But on the other hand, you have interest rates that may come down, or at least that expectation that rates could come down, and if they do, that's been a huge part of the impediment to more home sales, and so if those come down, one can presume that it could also be part of the solution. I'm not sure where this lands at this point, but maybe, John, what do you think more on, on that rate side? What's happening there realtime?

John Sim: Sure, so if you look at mortgage rates right now, they're about six-and-a-half, 6.6%, which is off their peak of about 7% back in February of this year. So more importantly, though, is really where can rates go? So now we're sorta trending into the tariff discussion a bit more as well. The impact of tariffs really has many facets, lower growth, weaker consumer, as you mentioned, and potentially a recession, but also could be inflationary. So, let's touch on those points a bit. So our economist is in the camp that he expects there to be a recession by the end of the year, and it, it forces the Fed to cut. This recent shift is then putting growth of GDP at about -.3% and unemployment about 5.3%, with core inflation going up to 4.4%. So, I'm giving you those numbers not just to throw economic (laughs) data at you, but so the negative growth, the -.3%, recession, and then the unemployment bit shows that we have it going higher. That 5.3% is relatively mild to prior recessions. And then the core inflation, important because it's still inflationary. But they also believe the Fed is gonna start easing in June, so that's a key point. In other words, they start cutting rates every meeting from now until January of next year, which would put the Fed Fund Rate at about 3% even. So they are leaning a little bit of the risk, stating the risk they potentially could start a little bit later in the year, so rather than starting in June, it could start maybe in July or August. Regardless, all this could potentially peg mortgage rates at about 5.75% at the end of '25. So almost 100 basis points lower. That's the real takeaway here, is we're six-and-a-half, call it 5.75 by year end. That's a pretty substantial move, and I, I think that can go a long way to actually helping. So that is good for home prices, though as you mentioned before, a weaker consumer, uh, a recession puts pressure on buying. And actually, it's only better to buy and to rent in about 1 to 2% of all MSAs, so there is still huge lean towards renting. We also argue that there has been a very powerful wealth effect in the market. Equities are up about three times their level over the past 10 years. In other words, if you go back and look at where the S&P was 2015, you normalize it to today, you're three times greater in your, in your portfolio. So, marginal buyers even though rates have been higher. That's been very supportive of the strong market. So, as the equity market's been growing, that's been keeping the buyers in the market. Now, the shift lower, obviously, tariffs has been pushing the equity market lower. We see the NASDAQ down, S&P down quite considerably. That could put pressure on home prices if it persists, because you take out that, that key borrower. And the key there is if it persists, you know? So we really haven't changed our home price forecast though, at this point. We still expect 3% growth in 2025, and that might come as a surprise, but we certainly would lean a little bit closer to zero growth or marginally negative if we continue to sell off and we see tariffs remaining intact. So, Tony, what do you think about the consumer here, and can you glean anything from the rental market, actually?

Anthony Paolone: Yeah, well, one item that comes to mind is you talked about just this dynamic between owning and renting, is that we've seen this data even come out very clearly from the landlords, where we've seen them reporting higher tenant retention rates, often pushing 55 to 60% in larger apartment communities, and that's up from where it used to be. It used to be numbers that even dipped below 50. And we've seen numbers up in the 70% range for single-family rental homes in some instances, so very high tenant retention rates. And also in a similar vein, very low move-out to home ownership. So the data's been pretty clear around all of this. Now, one interesting thing though, I would say, is, and I mentioned it earlier in part of the lead-in, was we saw rents that were, we think on a market basis, pretty flat-ish last year, but it wasn't so much because the demand wasn't there. It was really on the supply side, and so we saw this heavy amount of rental housing supply get delivered, but demand was actually a bit on the upside. It surprised us a bit and was stronger. And so, I wouldn't wanna take away that, that fairly flat-ish rental rate growth that we saw last year as being something on the demand side waning, or that folks were necessarily going out to, to buy those homes. It was really, you just had a year with outsized deliveries on the rental housing side. Look, let's maybe pivot back to tariffs. What do you think happens to the cost of building and prospects of supply right now?

John Sim: Yeah, it's interesting, because, you know, while we were just talking about some of the damaging effects of tariffs, some of the dynamics are around the cost of building should go up, right? Effectively, you're importing goods that are tariffed. There's a few estimates out there. It's hard to get really precise data on this, but we estimate about 5% impact on cost to build. Now, add to that, immigration, right? So now we're stepping into that, which isn't necessarily a tariff-specific thing, but it is... President Trump has a much stronger stance on immigration. That dynamic is also challenging and adds to the cost of build, because about 30% of the labor workers come from migrants. So I think that challenge there means that you'll see less building, effectively, right? Just less supply coming into the market. Which oddly enough, helps the housing market picture, because you just, you know, like we said, you're, that supply is what's been keeping home prices up and stronger. So, what are you seeing, really, on your side, Tony, in terms of that dynamic and cost to build, and what it might mean for multifamily?

Anthony Paolone: Yeah, well, we're hearing fairly comparable numbers, a fairly sizable range at this point. It's early. We've heard from low single digits up to 10% type increase in new construction costs, whether it's because of the immigration dynamic or the tariff dynamics. But you know, one of the items I would just go back to here is that if you're adding costs on the construction side, the likelihood of building more goes down. It's just harder for developers to make their returns. And what's also interesting is that as I, I mentioned, 2024 was a very big year for deliveries of apartment homes, and that's because you had very high levels of starts back in '21 and '22, and it takes two or three years to build these things and then deliver them. You haven't had as many starts over the last couple of years, and now we're talking about tariffs and immigration and the cost of building going up, which means that could keep starts muted even longer. Which creates a potential gap here of a couple of years, and I think if you talk to any institutional landlords, they will talk very clearly about this, where perhaps the next couple of years, you just don't have a whole lot of new supply, 'cause it's gonna take a couple of years, even if you start this stuff now, to build it and deliver it. So to the extent demand keeps up, and that's an if. It depends on this recession potentially playing out or not, but if the demand keeps up and you have a dearth of new supply for a couple of years, landlords will have pricing power restored to them and will start pushing rents. And something to also consider, and ties back a little bit to the economic forecast you highlighted, where the forecast calls for inflation to be kinda high, and rents are a factor in all of that. So that's my reaction to that. Now, look, let's maybe start to wrap this up a bit. We covered a lot of ground in a short period of time, and so I'm just gonna summarize. We have a fairly tight housing market in the US to begin with, with the stock of housing being about 90% utilized. It's been higher than it's been over the last 10 to 15 years. It's expensive to own, largely due to higher interest rates. We think rates could come down and lower the cost of home ownership, but there's still about 62% of borrowers you mentioned that have rates below 4% versus market rates that are in the sixes today, so still quite a bit of lock-in effect happening out there. And on the tariff and immigration side, we expect the cost of building structures, either for sale or for rent, is moving higher. That adds to the cost of ownership, and it also keeps new rental unit construction more muted, which in turn could give landlords more pricing power to raise rents. This is all somewhat predicated on avoiding a recession, but that's kinda what we're talking about here today. Anything you wanna add there, John?

John Sim: Right. Yeah, so just a few things. I think that one thing that comes to mind is around the insurance side, right? We haven't really touched on that, but I'm sure it's on the mind of people out there, where, you know, you look at regions and the cost of insurance is going up, right? And you're actually seeing in Tampa is the first area where home prices have declined consistently over the past three months. It's one of the few MSAs where you see consistent decline. And so that cost of insurance perhaps starting to hit some areas that have had more natural disaster risk, like Florida and California. But also, interestingly enough, tariffs and the cost to build will push up cost of insurance, right? Just 'cause if the house gets torn down, it's gonna cost the insurance company more money to, to rebuild it. So, there's gonna be more pressure there. We're really just starting to see the beginnings of that, but that's something to watch. And then I would just add more broadly that while we're talking about recession risk, there is no consensus in the market right now, and a lot of that has to do with the very volatile nature of tariffs. I mean, things could change very quickly. Home prices have actually, you (laughs) you know, historically, just as a second point, the home prices have actually held up really well in past recessions, just with the exception, obviously, of the Great Financial Crisis. And finally, I'd say we're just gonna be really nimble with our forecast here. So, while we are not changing it, it's important to know that a lot of these dynamics could change very rapidly, so keep an eye out for that.

Anthony Paolone: Thanks for that. Well, we're gonna try our best with our forecasts as well. We covered quite a bit here. Thanks, John, for participating today, and thanks everyone, for listening to Research Recap on J.P. Morgan's Making Sense.

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