Countdown to the US Housing Bust of 2017, 2018, and 2019

Existing US homes sold at the fastest clip in six years in June, according to the latest data from the National Association of Realtors. Meanwhile, median existing-home prices reached an all-time high of $236,400 per single-family home that month — surpassing the previous high of $230,400 from July 2006, when the last US housing boom was in full force.

But the good times in the housing market may not last much longer. Take it from Bank of America analyst Chris Flanagan, who called the subprime mortgage market in 2007 “very bleak” months before the housing bubble finally busted in the US.

In today’s market, Flanagan is predicting the US housing market will start reversing course in 2017, with “modest” declines for three straight years — 1.7% in 2017, 2.1% in 2018, and 0.8% in 2019.

The reason? Wages are not keeping up with the explosion in house prices.

While most analysts don’t believe that a bust is coming, Flanagan’s theory certainly makes sense. Consider that median home prices in the US have jumped more than 40% from $164,900 in 2010 to today’s $236,400, according to thelatest Fed data.

Over the same time period, inflation-adjusted wages have barely budged, growing a paltry 5% from $52,646 to today’s $55,132, based on data from Sentier Research.

Home Prices Far Outpacing Wages Since 2010

2010 Today % Change
Wages $52,646 $55,132 +5%
Home Prices $164,900 $236,400 +43%

Sources: Federal Reserve, Sentier Research

For those who think this is overly simplistic, consider this fact: Despite the strong housing recovery over the past few years, RealtyTrac’s June report revealed that there were still 7.4 million mortgage borrowers, or 13% of all mortgage properties, that were “seriously” underwater (defined as the loan amount being at least 25% higher than the property’s estimated market value) — a percentage that has actually ticked up for the past two quarters.

How could this be? As this article details, a report from Weiss Residential Research finds that roughly 50% of the homes in the nation’s top markets are losing value.

“Larger, more expensive homes are sitting on the market longer and seeing more price cuts than smaller homes with two bedrooms or less,” explains Alan Weiss, founder of the research firm.

In other words, as wage growth has come to a crawl, consumers have been opting for cheaper homes over more expensive ones.

But as today’s cheaper home prices rise in value and become out of reach for more and more potential borrowers and buyers, look for housing price hikes to come to a halt, or even reverse course, if you’re in Flanagan’s camp.

The Bottom Line: Sales and marketing professionals and other prospectors should look for luxury and higher-price homebuilders like Standard Pacific Corp and Toll Brothers to be hit the hardest as this trend continues.

Meanwhile, expect top affordable and move-up homebuilders like Lennar, NVR (the builder of Ryan andHeartland Homes), and D.R. Horton to ride out the good times longer … and be better positioned to wait out the potential storm ahead.