A Full-Blown U.S. Housing Market Crisis Is On the Way

  • The U.S. housing market faces a big problem in the form of weak affordability.
  • Loose lending in 2020 could create a toxic situation.
  • Lower credit scores pose another problem.

For the U.S. housing market, things are about to take a turn for the worse in 2020. There have been numerous signals that the U.S. housing market – which is nothing more than a bubble – could unravel soon. But there is one specific reason why the bubble could burst next year.

The biggest threat to the U.S. housing market

Home prices have been increasing at a breath-taking pace. According to data from Zillow, the median price of a home in the U.S. is $231,700, up 4.7% in the past year. In December 2013, the median value of a home in the U.S. was $163,300. This means that the average value of a home in the U.S. housing market has gone up over 42% in the past six years, according to Zillow data.

Home prices in the U.S. have taken off in the past six years. | Source: Zillow

For comparison, the average hourly wage stood at around $20 in 2013. The average hourly wage is now approaching $24, which translates into a rise of less than 20% over the past six years.

Average hourly wages in the U.S. haven’t kept pace with home price growth. | Source: tradingeconomics.com

Clearly, home prices have outpaced wage growth. Not surprisingly, housing affordability in the U.S. has dipped of late. According to ESRI’s (Environmental Systems Research Institute) Housing Affordability Index (HAI), Americans have been stretching their budgets to buy a house.

Housing affordability in the U.S. market has gone down of late. | Source: ESRI

ESRI’s 2018 HAI index reading of 124 was below the prior year’s reading of 129. An HAI reading of more than 100 means that an average U.S. household has sufficient income to qualify for a home loan based on the median sales price. The decline in this reading means that homes are getting more expensive while household incomes aren’t growing.

According to a report on Atlanta News Now, 38 million households in the U.S. spend over 30 percent of their income on housing, which makes them cost-burdened. The high cost of housing means that households are not able to save much after spending on other essential items.

This is the reason why consumers are being stingy when it comes to spending money. This is evident by the fact that retail sales in the U.S. grew just 0.2% in November, while economists were expecting 0.5% gains.

Weak spending by consumers will eventually come to haunt the housing market. But the bad news is that banks will probably try to get around this affordability crisis and eventually create a toxic scenario that will lead the housing market bubble to burst.

Loose lending could trigger a crash

Citing Moody’s, MarketWatch reports that potential home buyers could get easy access to loans in order to buy expensive homes despite having weak credit. The report goes on to explain:

Reduced home-purchase affordability will continue to drive lenders to loosen credit standards to maintain volumes,” wrote Moody’s analyst Donald Lee in the credit-ratings firm’s 2020 outlook. “With shrinking home affordability, the underwriting quality for non-prime mortgages will weaken as increased lender competition leads to lower standards.

According to Deutsche Bank, credit scores of borrowers in the age range of 30 to 59 years have declined this year. The degradation in credit scores can be attributed to auto loan defaults.

U.S. credit scores have been going down. | Source: MarketWatch, Deutsche Bank

So, the probability of defaults for a bigger ticket item such as a home could be higher next year if banks start lending money to consumers with weak credit history. The lack of enough homes on the market and booming prices are pricing buyers out of the market. The availability of easy credit could entice consumers into buying a new house, but it remains to be seen if they will be capable enough to service their debts in light of weak wage growth.

This could eventually spell the end of the U.S. housing market boom that has been driven by low mortgage rates, as a deeper affordability crisis could cause the bubble to burst.

This article was edited by Sam Bourgi.