The red-hot housing market continues at ridiculously high house prices for now. Can these continue? In this blog post I'll look at the latest trends and some historical data to provide some perspective on where we are at and where we may be going.
Recent data continues to show housing market strength, albeit with softening starting to show up in some of the data. Weekly mortgage applications remain strong but there has been a noticeable drop-off in refi applications. Meanwhile, the latest data on housing starts shows that single family home building may be declining, with more activity shifting to building multi-family dwellings. Single family homes starts have dropped 2.3% in the last year while multi-family building starts are up 38.5%. New building permits for single homes has also declined in the past year- 7.1%. (firstname.lastname@example.org). These declines are likely a reflection of the rapid price increases of the past couple of years and potential buyers increasingly being priced out of the market.
The question is how long can current price gains continue and how much higher can prices rise? A major factor is the discrepancy between Incomes and housing prices. Unfortunately, incomes are not even close to keeping up with home price appreciation over the last 50 years and affordability seems to be increasingly out of reach for younger Americans.
- home prices have increased by 118% since 1965, while median household income has increased by just 15% (after inflation).
- Home prices have increased 7.6x faster than income since 1965 (after inflation).
- To afford a home in 2021, Americans need an average income of $144,192. However, the current median household income is only $69,178.
- The average house-price-to-income ratio is 5.4, more than double the maximum of 2.6 that mortgage and other financial experts recommend.
- From 2019 to 2021, the pandemic has increased the average house-price-to-income by 14.9%.
- Nearly 90% of major metros have a house-price-to-income ratio that exceeds the maximum recommended ratio of 2.6.
- Among major cities, only Pittsburgh (2.2); Cleveland (2.4); Oklahoma City (2.5), St. Louis (2.5); Birmingham, Ala. (2.5); and Cincinnati (2.6) have house-price-to-income ratios below or equal to the maximum recommended ratio of 2.6.
- The least affordable metro areas are in California: Los Angeles (9.8); San Jose (9.1); San Francisco (8.3); and San Diego (7.8). (realestatewitch.com
Does that mean we’re in for a housing bubble pop? Not necessarily, but it does mean that the housing market is in a precarious situation. Housing affordability is made up 3 factors; incomes, housing prices and interest rates. With interest rates at historical lows, the current lofty housing prices may be able to maintain their levels as long as interest rates don’t rise significantly. If they do, or if we experience a recession and incomes drop or individuals are forced to put their houses on the market due to economic stress, then housing prices will almost certainly fall from their current "priced-to-perfection" levels, in response.
The views expressed are as of the date noted, are subject to change based on market and other various conditions, and are for educational purposes only. Statements of future expectations are based on current market and economic conditions, and actual results may differ from those expressed or implied.