All real estate is local (except when it’s not, more on that later), which is why real estate headlines can frequently seem foreign to individual readers. The news that home prices are up five percent year over year may not be relevant to your particular market. But if you live in certain markets in California, a five percent increase would be a dismal slump.
With that caveat, recent headlines proclaiming that new home sales nationwide plunged in 2016 are true largely due to a massive drop in the West, where new home sales slipped a gut-wrenching 23%. That sounds like good news overall – or at least localized bad news. But what we’re likely seeing out west is the beginning of home prices nationwide hitting the affordability wall.
Home Prices Going Up Faster than Your Paycheck
You don’t have to be a real estate expert or financial genius to understand the simple math of the housing market. Home prices are rising at more than double the rate of hourly salaries. Housing costs move up nearly six percent, while the increase for wages is closer to two percent. The overall problem is clear: A decade of low mortgage rates, combined with increased hiring, meant more people were buying homes—and raising prices. But every year of six-percent price hikes means the pool of potential buyers shrinks as the low end of the market can’t stretch any farther.
What’s more, this home price inflation simply can’t go on indefinitely as the pool of buyers continues to shrink. Between tightened lending standards and price inflation, we’re going to continue to see sudden and volatile market freezes. Fortunately, we’re still eleven points below the price peak we hit in 2006 and we don’t have subprime lending fueling another mortgage debt bomb. Or do we?
Insane Prices for Overburdened Would-be Buyers
According to the Wall Street Journal, the median price of a new home is now $288,000. That means a first-time buyer seeking a traditional mortgage would need almost $60,000 for a down payment, plus closing costs. Roughly forty million Americans live in a county where you need an income north of $100,000, plus $70,000 saved up front, to afford just an average home. Eighty million people live in counties where the average wage doesn’t support the average mortgage payment. Adjust the salaries to the local housing markets and the picture becomes even bleaker. Roughly a third of Americans are aced out the housing market.
America is House-poor
Between student loans, low-paying jobs and rising rents, young people are caught in economic stagnation. Those under thirty can’t build a stable financial future with the cards they’ve been dealt. Between student loans and rising rents there’s no way they’ll be able to save the $35,000 to $50,000 needed for a down payment. Even if they do, they’ll be stretched thin to make that mortgage payment every month; a picture that doesn’t leave a lot of room for saving or investing.
Another Meltdown Ahead
Remember when I said all real estate is local, except when it’s not? This is how it becomes not. The simple math says we’re in for another shock in the housing market in the near future. For anyone in the real estate business right now this has to seem like 2006 all over again. The numbers don’t lie; housing prices simply can’t keep increasing in the face of stagnant wages. Buying a house right now, unless you plan on being there a long time, is a big mistake. Furthermore, shockingly even with the price inflation, there are still over three million Americans underwater on their homes!
All it will take to set off these vapors in the housing market is the merest whiff of layoff notices. Any big financial crisis with mass layoffs and we’ll see foreclosures rip through the housing market, and our economy, all over again. Just like in 2006, this is not going to end well.