Guolian Minsheng Securities: Will interest rate cuts not save the US real estate market?

Guolian Minsheng Securities released a research report stating that with weak supply and demand in the real estate market, it is difficult for inflation related to residence and rent to stir up waves. In the first half of the year, the internal dynamics of the U.S. economy will undergo a process from strong to weak; in the second half of the year, with the new chairman taking office, there may be more room for interest rate cuts (represented by the dovish stance appointed by Trump), which may lead to a phase of downward movement in long-term interest rates, driving a certain rebound in real estate demand. In the second half of the year, rent inflation may pick up again, but the extent depends on the extent of the Federal Reserve's interest rate cuts. Of course, in the absence of a recession, more interest rate cuts are not necessarily better, as excessive cuts can bring about inflation expectations and activate market and economic self-adjustment mechanisms. The main points of Guolian Minsheng Securities are as follows: K-shaped differentiation is the main theme of the U.S. economy after the global public health crisis - during recovery, it is K-shaped recovery, and during downturn, it is K-shaped downturn. Investment in manufacturing, especially high-end manufacturing, is playing an increasingly important role in economic growth, mainly relying on the market narrative of AI investment, while the real estate sector is showing sluggish performance, which is also reflected in the stock market. However, for Trump 2.0, real estate is undoubtedly an important piece of his policy puzzle: whether from Trump's own background or from the important significance of real estate to people's livelihood and public opinion. In the mayoral election in New York in November, the Democratic candidate won by controlling housing rents and other measures related to people's livelihood, which also sounded the alarm for Trump. Undoubtedly, the biggest expectation for the U.S. real estate market next year comes from the Federal Reserve's interest rate cuts. According to past experiences, interest rate cuts are undoubtedly positive for real estate. Looking at annual data, the stimulating effects of interest rate cuts will be reflected in real estate investment, construction, and sales data within 1 to 2 years. During the early stages of an interest rate cut cycle, house prices typically see a noticeable rise in 6 to 18 months. So, can the logic of interest rate cuts work? Firstly, looking back at the current U.S. real estate downturn. Compared to history, the biggest difference in this adjustment is the relatively long duration, already lasting for 4 years since November 2021. Although the decline in existing home sales may not be as large as before the 2008 financial crisis, a significant difference is that new home sales are showing exceptional resilience during this period, with house prices visibly rising. Where do the problems lie? The complexity of this current cycle lies in the interaction of cyclical and structural factors. On the cyclical side, the process of interest rate cuts is not smooth, with interest rates staying high, 30-year mortgage rates remaining above 6%, and fixed-rate loans dominating existing home loans, which are less affected by interest rate cuts; structurally, the problem of housing shortage since 2008 is beginning to show, amplified by high interest rates and high tariffs, resulting in caution from real estate developers, leading to core issues of high interest rates and high house prices. In addition, existing mortgage interest rates remain low, and residents are unwilling to buy or sell. As of the second quarter of 2025, over 52% of the existing mortgages in the U.S. have interest rates below 4%, which means residents are not willing to switch unless interest rates significantly decrease. This leads to a decrease in transactions for existing homes as the supply diminishes. Can the loan term be shortened? After all, shorter-term loans usually have lower interest rates. However, it's relatively difficult because shortening the loan term often means a corresponding increase in monthly payments. Currently, American homebuyers are facing another obstacle - affordability - as high house prices and high interest rates are making monthly payments burdensome. According to the latest data from the National Association of Realtors, in the third quarter of 2025, the average monthly mortgage payment accounted for 24.8% of monthly income, and for first-time buyers, the ratio was as high as 37.4%, making it difficult for many to afford a home. High interest rates and high house prices restrict demand, but the housing gap in the U.S. remains at historically high levels. According to U.S. census data, as of 2023, there is a housing gap of about 4.7 million units in the U.S. (supply: 3.4 million vacant homes for sale/rent vs demand: 8.1 million households sharing with non-relatives). What does this mean? In 2024, post-financial crisis, only 1.63 million homes were completed (estimated to be lower than last year), while the number of new households added in the U.S. each year is generally around 1 million (average of the past ten years, excluding 2020). This housing gap puts pressure on house prices and rents. Therefore, despite seeing reasonably good performance in new home transactions and construction activities during the current downturn period, the demand has shifted more towards rental housing, resulting in stagnant rental prices. If we don't take into account the substantial income support and housing subsidies provided by the government to its residents, in the past, the quick solution to the current U.S. real estate problem has been a recession. Two possible ways to rebalance are: a significant decrease in long-term mortgage rates and a major drop in house prices (or both). A recession provides an environment for significant interest rate cuts and enables a smoother transmission to long-term rates. Without a recession, can interest rates be drastically cut to break the deadlock? This is difficult, as the challenge lies in transmitting from the short-end to the long-end. Firstly, the likelihood of a recession in the U.S. next year under the baseline scenario is low (after all, it is a midterm election year). Since the 1990s, in non-recession years, the Federal Reserve's interest rate cuts have generally not exceeded 100 basis points, and because the economy is usually in good shape, the rate cuts are usually not prolonged (within six months). Looking at the complete cycle of interest rate cuts, the drop in 30-year mortgage rates is often smaller than the cut in interest rates. The only example of a large drop in rates over a period was from mid-1995 to mid-1996, but this was during a period when the U.S. dollar was appreciating and the Clinton administration had a more fiscally conservative approach. Furthermore, in the Reagan administration, there were also significant interest rate cuts without a recession. From 1984 to 1986, the Federal Reserve slashed rates by over 500 basis points, resulting in a significant drop in mortgage rates and a substantial increase in house prices by over 23%, with existing home sales rising by 36%. However, this period had specific circumstances as well: 1) the Reagan government began gradually reducing the fiscal deficit, and 2) the U.S. dollar was experiencing a strong appreciation period. These factors put pressure on economic growth, while inflation continued to decline. Therefore, looking at the current challenges in the U.S. real estate market from a demand perspective, addressing the current issues of high house prices and high interest rates would require a more pessimistic economic outlook and expectations to lead to interest rate cuts exceeding 100 basis points or even 200 basis points, as well as smoothly transmitting them to long-term rates. From a longer-term perspective, Trump's policy direction has already pointed towards using time for space, emphasizing supply-side reforms, and encouraging residents to leverage. By lifting constraints on the supply side, reducing restrictive policies and regulations to promote housing supply, and considering the introduction of 50-year mortgages (lowering monthly payments) to encourage residents to leverage. However, this process will take time, especially as American real estate developers are currently facing pressure from tariffs and weak demand. Looking ahead to next year, the following outlook can be made: - Supply side: Incremental supply will not be too significant. The performance of real estate supply this year will be weaker than last year, but the situation is expected to improve next year (stimulated by interest rate cuts). However, builders are generally cautious. Taking the example of the largest home builder in the U.S. (D.R. Horton), this year, they are expected to deliver 85,000-85,500 homes, and their latest financial report shows plans to deliver 86,000-88,000 homes in 2026, with a growth rate of 1% to 3%. This year, residents are burdened, and tariffs directly impact costs, forcing real estate developers to reduce margins through promotions like lowering down payments and free upgrades to boost sales. - Demand side: In the short term, it is difficult to see a significant decline in house prices without interest rate cuts and their transmission. Combining calculations from Harvard University and recent income growth among households in recent years, for mortgage rates to need to decrease by over 300 basis points for the relative burden of monthly payments to return to 2020 levels without a change in house prices. - Economic and policy rhythm for next year: The bank tends to see the first half of the year as setting the stage and the second half as the performance. In the absence of a recession and with inflation remaining relatively high, the Federal Reserve's interest rate cuts are likely to be cautious. The bank believes that with weak supply and demand in the real estate market, it will be difficult for inflation related to residence and rent to stir up waves. In the first half of the year, the internal dynamics of the U.S. economy will undergo a process from strong to weak; in the second half of the year, with the new chairman taking office, there may be more room for interest rate cuts (represented by the dovish stance appointed by Trump), which may lead to a phase of downward movement in long-term interest rates, driving a certain rebound in real estate demand. In the second half of the year, rent inflation may pick up again, but the extent depends on the extent of the Federal Reserve's interest rate cuts. Of course, in the absence of a recession, more cuts are not necessarily better, as excessive cuts can bring about inflation expectations and activate market and economic self-adjustment mechanisms. An important note is the fiscal policy, although the tax break law will gradually take effect, Trump may not be very generous in other fiscal expenditures due to concerns about mounting debt and reluctance to overstimulate the economy. For Trump 2.0, resolving domestic issues in the U.S. will require seeking answers externally, such as through international trade policies and overseas investments. However, it is important to note that with more stories of the lower class facing a "payment crisis" dominating mainstream media, the Democratic party may use more targeted fiscal policies to attract voters. Issues related to people's livelihoods will become an important theme in next year's election, and if Trump's approval rating further declines, it is not ruled out that he may reluctantly introduce new fiscal policies to improve the ability of the lower class to pay. This could lead to a greater negative impact on the U.S. dollar and U.S. bonds. Risk warning: Major changes in U.S. economic and trade policies; Overseas investments landing beyond expectations, leading to better-than-expected performance in the U.S. economy next year.