Housing Market Risk: The US housing market is both better and worse than pre-financial crisis. On the one hand debt to income ratios have come down a lot — meaning less leverage and therefore less likelihood of negative equity, defaults, credit stress, and systemic risk to the banking system.

Borrowers also have a greater likelihood of having fixed their interest rate, with much less exposure to variable rates this time around.

However — house purchasing power goes down as rates go up. Regardless of mortgage stress, this mathematical fact naturally acts as a sinking lid on house prices.

This is particularly interesting when you realize US housing market valuations have surpassed the extremes of the subprime bubble. So maybe we see less stress given less leverage, but we still likely see a material correction as rate shock meets stretched valuations. At the very least this will act as a clear headwind to growth/confidence.

Key point: US housing market is less leveraged, but more expensive vs pre-08.

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