Home Prices Outpace Pay Increases

Affordable housing is increasingly hard to find in today’s market. According to data from Trulia, America’s inventory of starter homes has decreased by almost half compared to 6 years ago while prices rose by almost 58%.  As consumers recovered from the housing crisis and Great Recession, more people became financially able to own a home. The existing supply was quickly consumed, leading to the current imbalance.

Recent polls suggest that affordable housing woes will continue through 2018 and beyond. According to a Reuters poll of property market analysts, home prices are expected to increase at almost double the rate of wages through 2018. Home prices are predicted to gain 5.7% more over the course of the year, while average annual earnings growth is predicted to be 2.8% – slightly above the predicted inflation rate of 2.5%.

Wages are finally beginning to rise as unemployment levels reach new lows. May’s 3.8% unemployment level is the lowest since 2000. However, the pressure on employers to find workers hasn’t produced proportionally higher wages. Annual wage increases are still stuck below 3%.  Wage growth may hit the 4% range by 2019 – but the Reuters poll predicts that home prices are still likely to beat out wages with a 4.3% growth rate in 2019. The supply issue is expected to ease in 2020 as home prices are expected to rise by only 3.6%.

Unfortunately, the home price correction may come from the demand side instead of the supply side. While housing starts continue to trend upward, not enough of them are in the affordable range. Even though demand is high, rising land and labor costs make it difficult for developers to make money catering to the lower-end market.

Yet another obstacle is that mortgage interest rates are rising – although, in historical terms, today’s 4.7% rate is still a decent deal. From 1972 to 2008, mortgage interest rates were never below 5%.  The Federal Reserve is expected to continue to raise interest rates throughout 2018 and 2019 to bring them back toward historical norms. Reuters predicts the average interest rate on a 30-year mortgage to reach 5% by the end of 2019, but it may be sooner.

Source:  MoneyTips