MADISON, Wis.—While home prices are not yet bringing the nation close to another housing bubble bursting, it may be time for lenders to pay attention to growing collateral risk.
TruStage Chief Economist Steve Rick addressed what is beginning to surface within the housing market, and also what is ahead regarding CU liquidity.
“Some people are concerned that home prices are overvalued again and creating another home price bubble,” Rick noted. “One way to measure overvaluation is to compare today’s home price-to-income ratio and home price-to-rent ratio to their historical averages.”
(See related story on housing prices).
Historically, Rick pointed out, a house in the U.S. cost around three to 3.5 times the median annual household income.
“During the housing bubble of 2004-2005, the median price for a single-family home cost more than 5.1 times the median annual household income. Today, that ratio stands at 4.8,” Rick said.
Rick said TruStage does not expect home prices to crash in the next couple of years.
“But we expect home price growth to slow to 1%-2% nationwide, and in some areas to see modest declines,” he said. “This means newly originated home loans will experience more collateral risk, since the underlying collateral—the house—won’t rise in value 5% to 10% as we’ve seen over the last few years. So low downpayment loans will see greater risk than the traditional 20% downpayment loan.”
CU Deposits
Turning to credit union deposits, Rick noted that excessive members savings—built up during the pandemic—have been eliminated due to member deposit withdrawals and higher inflation.
The average credit union member currently holds $13,703 in total savings deposits at their credit union, down $430 from the record $14,133 in April 2022. And when adjusted for inflation, real savings per member has been declining since April 2021 when it reached a record high of $16,062, TruStage data show.
“Real savings measures the purchasing power of dollar deposits. Since April 2021, prices have risen a total of 18%, reducing the purchasing power of members’ savings deposits,” Rick said.
What should CUs understand about this trend?
“The worst of the credit union deposit/liquidity crisis is in the past,” Rick said. “Credit unions should expect faster deposit growth in the future since members’ excessive savings have been eliminated. Members will start growing their deposits around the long-term trend of 4.2%. When you add in membership growth of around 3%, we should get a deposit growth of 7% next year. So, we are now forecasting 7% deposit growth in 2025, above the 5.5% in 2024 and 1.6% in 2023.”