Home prices have returned in most markets to the peaks of 2006-07 but wages have not seen significant increases over that time. Let's hope our economy can start producing real jobs so more Americans can afford a home. In the meantime buyers should pay close attention to rate they perked up in December and appear to have leveled off, for a little while at least.
Fast-Rising Home Prices Plus Slower Wage Growth Could Equal a Problem
By Clare Trapasso | Mar 24, 2016 originally posted here.
As Scooby-Doo would say: Ruh-roh!
Housing prices are rising at a faster pace than wages across the U.S.—and that could spell extra trouble for those looking for a home to call their own, according to a recent RealtyTrac report.
The average worker typically spent about 30.2% of his or her paycheck on the combined mortgages, property taxes, and insurance premiums on a median-price home costing $199,000, according to the report. RealtyTrac looked at housing prices for the first two-and-a-half months of this year as well as U.S. Bureau of Labor Statistics wage data from the third quarter of last year, the most recent available, for the report.
That’s a hefty 26.4% over the first quarter of last year.
Home price growth outpaced earnings in nearly two-thirds, or 61%, of the markets tracked in the report.
“We’re heading in a direction where people are no longer going to be able to afford homes,” says RealtyTrac spokesman Daren Blomquist. “The fear: Is this heading in the direction of a housing bubble?”
The numbers are also a big jump from early 2012 when workers plunked down only about 22.2% of their earnings on their new homes. But it’s a significant drop from the titanic 53.2% that homeowners spent at the peak of the pre-collapse real estate market in 2006.
The report looked at public sales deeds in counties with at least 100,000 residents and average earnings data from the U.S. Bureau of Labor Statistics. Affordability was calculated based on the percent of earnings required to meet a 3% down payment (which, in the world of down payments, is pretty low) as well as make payments on the property taxes, insurance premiums, and a 30-year, fixed-rate mortgage for a median-price home.
Lower interest rates on mortgages have kept home buying still reasonably affordable.
But if those rates, along with home prices, continue to rise—while wages don’t—Blomquist worries only the superwealthy will be able to afford to become homeowners. Or prices could plateau or even plummet.
The worst-hit area tracked by the study: Denver. Buyers in that fast-growing city saw the biggest hikes in the percentage of their wages they shelled out to purchase a new home compared with what buyers had paid in the past.
“Our home values are increasing about 1% a month,” says Denver-area real estate agent Kristal Kraft at the Berkshire Group. “It’s insane. I’ve never seen anything like it.”
The Colorado capital was followed by counties in New York City; Omaha, NE; Austin, TX; San Francisco; and St. Louis.
Brooklyn, NY, was ranked the most populated county where homeowners saw the biggest increase in what they forked over for their personal palaces compared with previous years.
The most affordable market for wannabe homeowners was Boston, when looking historically at how much of home buyers’ paychecks went toward the purchase compared with previous years.
Next up were counties in Baltimore; Birmingham, AL; Providence, RI; and Chicago.
Here’s a surprise: The most populated and more affordable county was Los Angeles.
When housing costs rise faster than salaries, workers will often take a closer look at which jobs they can afford to accept and which parts of the country they can afford to live in, says Daniel Shoag, a public policy professor at Harvard University.
“You basically have a situation where it’s not worth it to move to expensive cities, if you don’t have a high-paying job,” he says. Or they’re just loaded.
However, it isn’t “out of whack” for homeowners nationally to spend about 30% of their paychecks for the roof over their heads, he says.
“But it could put the strain on budgets if [prices] continue to rise,” Shoag says.
Clare Trapasso is the senior news editor of realtor.com and an adjunct journalism professor. She previously wrote for a Financial Times publication and the New York Daily News. Contact her at firstname.lastname@example.org. Follow @claretrap