Low Wages and High Prices Bring Housing Stagnation



The low-income and young struggle to enter the housing market. There isn’t any surprise in that. It has always been a challenge for first time buyers and will remain a fact going forward. This is clearly reflected when homeownership is looked at by age and income. According to the U.S. Census Bureau, first quarter 2017 homeownership rates were highest for those age 65 years and over (78.6 percent) and lowest for the under 35 group (34.3 percent). Neither of the rates for these two age groups are statistically different from the first quarter of 2016.

However, the homeownership rate has been steadily declining for the past 5 years. Most importantly for those under age 35, which stood at 36.8 percent the first quarter in 2012 (80.9 percent for those over age 65 at the same time).

As would be expected, a similar difference exists regarding income levels. The current ownership rate is 77.9 percent for those with family income greater than or equal to the median family income. And is currently 49.3 percent for those with family income less than the median family income. The corresponding percentages 5 years ago were 65.4 percent and 50.4 percent.

Why Today’s Market is Different

For the U.S. as a whole, the average qualifying income is $42,962 and the median home price is $232,200. The current real median household income of $56,516 is lower than the record $70,057 of 2007. It’s also lower than the $69,741 earned as far back as 2000. These are strong reasons for a higher percentage of homeownership in the past. Keep in mind the Median average shows half the numbers above the median and half below. And Real income removes the effects of inflation. Therefore, real purchasing power is substantially lower today than it was when homeownership was significantly higher.

Understandably, people are having more trouble saving a big down payment and being able to qualify for ownership. New construction is a leading indicator of where the economy expects real incomes to go (less purchasing power). Additionally, the large number of baby boomers entering retirement are not willing to risk limited retirement dollars by selling their existing dwelling to take on a bigger mortgage in exchange for more luxury. Therefore, new construction and existing house sales are a scarcity today. Shrinking inventory defines today’s market even in the reality of high prices and bidding wars.

Rentals are another important factor in today’s housing market. It’s true that rental based real estate investment trusts (REITs) have done well in recent years – especially since the end of the housing crisis. But today’s reality is rent growth is now slowing. Tenants have reached the limits of what they can pay. As this continues, REITs will no longer be able to continue increasing their bottom lines. Some 5 million or so households that once owned homes went back to renting. Almost all of the households squeezed out of owning during the crisis are now back to renting. Apartment demand is no longer growing. Future bottom line increases will come temporarily as REITs sell these rentals for a profit. This will soon become significant.

What Is Likely to Happen in Tomorrow’s Market?

Tomorrow, stagnant means mostly balanced. The fact is both rental and purchase prices cannot significantly out pace incomes. Rents are already stagnating and home sale prices soon will. The large portion of the 5 million single family rentals poised to return to the ownership market will be a driving force in stagnating purchase prices. Of course, this will be coupled with the limited incomes.

Prices in the rental and sales markets are topping out. The result is likely to be the limiting of price growth that will closely be in line with inflation while simultaneously increasing the inventory of houses available on the market (rentals returning to ownership). Within the next 18 months, inventory can be expected to return to a 6 month supply – a balanced and more affordable market.

Please leave a comment if this article was helpful or if you have a question.

Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for seven years. He also draws upon 35 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. In the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.

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