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Housing prices in the U.S. have reached record levels during the COVID-19 pandemic and show little sign of slowing down. A combination of strong demand, low inventory of existing homes, and constraints on new construction due to labor and supply shortages have sent prices sharply upward, with the median home sales price in the U.S. recently topping $350,000 for the first time.
While appreciation in home values can be good for homeowners in building equity, price increases can put homeownership out of reach for low and middle income households. And even those who are able to buy may end up in a position of spending more than they can afford. Mortgage lenders evaluate factors like household income and debt-to-income ratio before approving a loan. However, even with such measures in place, a household may struggle to make regular payments and keep up with other expenses, especially if they experience a sudden change like job loss.
The risks to overleveraged homeowners can be great because housing is the most expensive consumer spending category for most U.S. residents and also the largest source of household debt in the U.S. Housing debt currently totals more than $10 trillion, accounting for nearly 70% of the US. total. If rising home prices push mortgage payments and other associated costs beyond a homeowner’s means, that household could find itself at risk of default. Because so much capital is tied up in housing debt, widespread difficulties with housing costs can also put the larger economy at risk, as the collapse of the housing bubble and Great Recession proved in the mid- to late-2000s.