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The U.S. Housing Market Bubble Could Burst in 2020

Last Updated September 23, 2020 1:19 PM
Harsh Chauhan
Last Updated September 23, 2020 1:19 PM
  • The U.S. housing market could take a turn for the worse next year as Realtor.com data suggests.
  • The market is currently in a bubble as adverse economic conditions won’t favor the recent price rise.
  • Weak wage growth and rising mortgage rates are bad news for the market in 2020 as affordability will take a hit.

The U.S. housing market is in a bubble right now, though you might not be willing to believe the same. After all, home prices seem to be on a roll as per the Case-Shiller Home Price Index, and they are expected to rise in the mid-single digits next year .

But Realtor.com’s 2020 National Housing Forecast reveals the grim side of the market in the U.S., throwing up a series of warnings about why the bubble is all set to burst next year.

Warning signs that the U.S. housing market bubble will burst soon

Realtor.com predicts that the price growth  the housing market has enjoyed this year will fizzle out in 2020. Contrary to more bullish claims, the real estate listings website predicts a negligible increase of 0.8% in home prices next year.

What’s surprising is that despite this meager price increase, home sales in the U.S. are expected to drop in 2020. Realtor.com predicts that lack of home supply and an increase in mortgage rates will dent housing demand in next year. As a result, sales of existing homes are anticipated to drop to the tune of 1.8% in 2020.

These are ominous signs for the U.S. housing market, which is already in a bubble thanks to weak economic growth and the possibility of a recession. Mortgage rates are on the rise already, and this has the potential to pop the U.S. housing market bubble. The 30-year fixed-rate mortgage was up to 3.68% for the week that ended Nov. 27. This was a slight jump from 3.62% the week before.

Realtor.com anticipates the mortgage rate to increase to 3.88% by the end of 2020. That’s bad news for the U.S. housing market as higher mortgage rates will reduce housing affordability. In fact, the small rise in mortgage rates has already caused a drop in applications. According to a report by the Mortgage Bankers Association, the volume of mortgage applications dropped 9.2% last week .

Mortgage applications for new home purchases fell 24% year over year. U.S. housing market bulls would argue that the drop in mortgage applications was caused by the timing of the Thanksgiving holiday. But a closer look will reveal that there’s much more that’s going wrong in the market.

What will cause the bubble to burst?

The U.S. housing market is in a bubble as buyers have been resorting to debt to finance their home purchases. That’s because home prices have been rising at a much faster pace than wages. So, low mortgage rates are crucial to the growth of the housing market in the U.S. That’s because U.S. companies are currently in an earnings recession, which could put a dent in wage growth and job prospects of Americans.

At the same time, the manufacturing sector is undergoing a sustained period of contraction. According to the Institute for Supply Management (ISM), the Purchasing Managers’ Index (PMI) was 48.1% in November , down from the previous month’s reading of 48.3%. This was the fourth consecutive month when the PMI was below the 50 percent mark. A reading of less than 50 indicates contraction.

A recession in U.S. manufacturing and an eroding bottom-line profile of companies will dent job and wage growth prospects, creating a headwind for the U.S. housing market. As it is, consumer confidence in the U.S. has been on the wane for four months straight , indicating that Americans could get stingy given the clouds of economic uncertainty that are lingering right now.

As U.S. housing market inventories continue to remain tight and lead to higher prices, buyers are likely to pull out of the market. In such a scenario, sellers will be forced to lower prices, leading to lower prices despite inventory shortages. This will cause the U.S. housing market bubble to eventually burst, and such a moment could arrive next year as Realtor.com’s report tells us.