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A U.S. Housing Market Bubble 10 Years in the Making May Pop in 2020

Last Updated September 23, 2020 1:25 PM
Laura Hoy
Last Updated September 23, 2020 1:25 PM
  • Evidence that the US housing market has become a bubble is starting to stack up.
  • The affordability of US homes has dropped significantly, making it difficult to attract new buyers.
  • The current climate in the housing market is conducive to dangerous lending as buyers overextend.

In the lead-up to 2020, the US housing market faces conflicting forecasts, but the evidence that a bubble 10 years in the making is about to pop is starting to pile up.

Though low rates and an improving economic climate should create the perfect environment for the US housing market to thrive, data releases show there could be trouble brewing under the surface. 

Homebuilders and Buyers Disagree

The National Association of Home Builders/ Wells Fargo Housing Market Index rose to 76  in December— the highest reading in two decades.

Taken at face value, the data suggest that the US housing market is on track for continued strength. But taken together with the University of Michigan’s consumer sentiment data, it looks more concerning. That’s because while builders are becoming more and more optimistic, potential homebuyers are growing more hesitant . 

us housing market consumer sentiment
Consumer sentiment on the housing market is in a steady decline. | Source: University of Michigan 

A big part of the reason for consumers’ declining home-buying sentiment was believed to be interest rate hikes. The figures show that the drop in sentiment began in 2015, when the Fed initially started raising rates. But given that the bank’s most recent rate cuts didn’t reverse the trend, something else is likely contributing to that decline. 

According to analysts at Sundial Capital Research, the divergence between builders and buyers is unusual. The two typically move together .

Rising Home Prices Weigh on US Housing Market

More evidence that buyers aren’t confident in the state of the US housing market came in mid-December when existing-home sales dropped  to 5.35 million units in November— below expectations.

Inventory showed an even more worrying trend— the number of existing homes up for sale was down to 1.64 million, which translates into just under four months’ worth. A six-month supply is considered healthy.

US Existing Home Sales

us home sales chart
Existing home sales in recent months confirm bearish sentiment data. | Source: Trading Economics 

The lack of inventory has created an affordability crisis within the US housing market, which could explain why potential home buyers are hesitant.

Existing home prices are up 5.4% from the previous year. Over the past six years, the average US home has seen its value rise 42%. Compare that to the 17% wage increase that the average worker has had over the same period, and you have an affordability crisis.

Trouble Is Brewing

This affordability issue could impact the US housing market in a few ways. Macro Intelligence Chief Economist Julian Brigden says it could dramatically decrease housing activity . Just because the Fed keeps interest rates low doesn’t mean people will take out loans, especially if they can’t afford to buy in their area.

The affordability crisis means fewer new home buyers can afford to get on the property ladder, even with the Fed’s rate cuts. Data show that US mortgage applications have been on a steady decline throughout 2019, which could, in turn, push banks to start loosening their lending criteria. 

US MBA Mortgage Applications

us mortgage applications chart, housing market data
Despite low rates, mortgage applications are still declining. | Source: Trading Economics 

While the financial crisis back in 2008 resulted in increased lending scrutiny, the outcome hasn’t been quite as safe as many believe. In fact, some of the safeguards put in place to prevent another crisis have since been undermined— thus allowing risky mortgages back out onto the market.

According to the Washington Post , Fannie Mae, Freddie Mac and the Federal Housing Administration back nearly $7 trillion worth of debt linked to mortgages. That’s 33% higher than it was before the housing market crash.

us homeownership rates chart
A decline in homeownership prompted regulators to reevaluate their mortgage criteria. | Source: Statista 

When homeownership rates dropped back in 2013, regulators were forced to confront some of the backstops they’d put in place to limit the types of mortgages being offered. The end result is a growing number of Americans who are paying off mortgage debt equal to 50% or more of their monthly income.

In 2016, 14% of the loans guaranteed by Fannie May were collecting roughly 50% of the borrower’s income. In 2018 that figure rose to 30%. For the FHA, the growth is even more alarming— the percentage of risky loans backed by the government has jumped from 38% in 2018 to a staggering 57% last year.

No one can predict with certainty where the housing market is heading. Still, the mounting evidence that the US housing market has become another dangerous bubble waiting to pop is becoming harder and harder to ignore.