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An Earnings Recession Could Pop the US Housing Market Bubble

Last Updated September 23, 2020 1:19 PM
Harsh Chauhan
Last Updated September 23, 2020 1:19 PM
  • The U.S. housing market seems to be on a roll apparently.
  • An earnings recession has already set in, and this could dent the market’s momentum.
  • Weak wage growth and potential job losses might pop the U.S. housing bubble.

The U.S. housing market seems to be on a roll as recent data suggests, but there is a high chance of things going downhill quickly. The economy is not in great shape, the U.S.-China trade war keeps raging on, and wage growth has been tepid at best in recent months.

But this isn’t all that could eventually pop the bubble that the U.S. housing market is currently in. The U.S. is currently going through an earnings recession, and this could bring an end to the good times that the U.S. housing market is currently enjoying.

An earnings recession is bad news for the U.S. housing market

MarketWatch reports that the S&P 500 index’s earnings are set to drop 1.51 percent  in the fourth quarter of 2019. The bad news – S&P 500 components witnessed a decline in their bottom lines in the first two quarters of 2019. MarketWatch anticipates a similar trend in the third quarter.

That’s because earnings reports from 95% of the components of the S&P 500 have revealed a 2.34 percent earnings decline so far. This is the largest earnings decline seen so far in 2019. And if the fourth-quarter earnings numbers also decline, it would be the first time since 2015 when earnings of S&P 500 components have receded for four quarters in a row.

An earnings recession happens when there are at least two consecutive quarters of annual earnings declines. Going by that definition, we are deep in an earnings recession. And that’s bad news for the U.S. housing market for a few simple reasons.

First, weak corporate earnings reduce the scope for wage increments and bonuses, as companies will try to preserve their margins. Sustained bottom-line weakness could even lead to layoffs. As it turns out, employers are already turning toward layoffs in a bid to keep costs low. Placement firm Challenger, Gray & Christmas reports that U.S.-based employers announced 50,275 job cuts in October , an increase of 21 percent from September levels.

What’s more, the number of job cuts announced by U.S. employers through October 2019 stands at 515,441. That’s a bump of 16.6 percent over the same period last year. These numbers don’t bode well for the U.S. housing market, as the loss of confidence as far as job security is concerned will discourage people from buying new homes.

Weak wage growth and low housing supply will price buyers out of the market

The earnings recession will not only force companies to reduce their workforce but also cut down on wage growth. As it is, wage growth in the U.S. is below the 3.5 percent to 4 percent range  that’s needed for workers to benefit from an economic recovery.

Chart showing wage growth.
Wage growth has been tepid over the past few years, while home prices are going through the roof. | Source: Economic Policy Institute

Wage growth in the U.S. has been tepid at best since the last recession as companies have kept workers’ share of corporate income under check. In case of an earnings recession, workers who manage to hold onto their jobs will have to contend with lower wage growth.

All of this is bad news for the U.S. housing market that’s already suffering from tight supply. According to the RE/MAX National Housing Report, housing inventory in the U.S. market fell 9 percent year over year in October . There was just 3.1 months of housing supply on the market, according to RE/MAX, which is the lowest October number in the report’s 11-year history.

Thanks to the weak supply, the median price of a home in the U.S. increased 8.4 percent year-over-year to $254,000. This makes it clear that more buyers could be priced out of the U.S. housing market as home prices are increasing at a much faster pace than wages.

Low mortgage rates might not save the market from a decline

The U.S. housing market has been propped up by low mortgage rates so far, but it risks losing that tailwind in the coming months. At the same time, the persistent decline in corporate earnings will further dent buyers’ confidence. They wouldn’t want to buy a house even if mortgage rates remain low thanks to an uncertain job environment. And once that happens, the U.S. housing market that’s turning into a big bubble will burst as prices will start crashing thanks to weak demand.

Disclaimer: The above should not be considered trading advice from CCN.com.