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U.S. Housing Prices Out of Touch with Reality

  • Cedric Brenninkmeijer
  • July 30, 2017
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U.S. home resales have been unable to match expected projections in June as prices reach record highs, keeping first-time buyers hesitant on the peripheral. The record high housing prices are a result of a small property supply being pursued by a large customer demand, meaning that the value of each property increases as the supply dwindles.

The housing market has been facing a severe shortage of homes available for sale for about two years, all the while new individuals are entering the housing market searching for accommodation. As the labor market releases more jobs while builders simultaneously struggle to secure land, building materials, and skilled labor, the situation is set to worsen.

On one hand, the high demand for housing signifies a positive and encouraging economic health that enables laborers to have the means and intent for housing, but when it comes to the housing markets, buyers tend to be less enthusiastic. While this climate impacts current and future homeowners, those especially impacted are first-time buyers who are now in a difficult position when trying to find entry-level homes for sale.

The shortage of properties has led to customer bidding-wars, as the demand ensures real estate the ability and flexibility to ask a higher sales price on the basis that there are customers willing to pay more. This has quickly resulted in house price increases outpacing wage gains, making it but nigh impossible for lower salary wage earners to afford housing.

The National Association of Realtors has reported that existing home sales have dropped 1.8 percent to a seasonally adjusted annual rate of 5.52 million units last month. Economists including Svenja Gudell, chief economist at Zillow, predict that sales will fall a further 1.0 percent to a 5.58 million unit-rate, despite sales being up 0.7 percent from June 2016.

There were 1.96 million houses on the market last month, which was done 7.1 percent from a year ago, however, this is not the first dip in a trend. In fact, housing inventory has dropped for 25 months on a year-to-year basis. As the supply diminishes, prices rise, and considering the increasing demand for housing, the prices greatly rise. The median house price has increased 6.5 percent from a year ago to a record high of $263,800 in June, as part of the unbroken 64-month chain of year-on-year price increases.

Despite the constant price increase as well as the persistent housing shortage, the NAR believes that the price surge does not suggest another housing market bubble is building. This is based on the fact that the inflation-adjusted median price was below its peak in 2016.

Houses are typically staying on the market for 28 days last month, lower than the 34 days’ average that was present a year ago. Demand is being driven by a tight labor market, which currently holds a 4.4 percent unemployment rate that is boosting employment opportunities for young workers. But the tight labor market has not stimulated a faster wage growth, with an annual wage growth struggling to break above 2.5 percent, creating a distinct and increasing gap between the two.

First-time buyers are accounting for a smaller share of home sale transactions at 32 percent, which is well below the ideal 40 percent share that is needed for a robust and thriving housing market. This is not something that is simply corrected by reducing housing prices or increase wage growth but requires a combination on the two alongside other qualities including a maintained housing demand.

Property economists expect the housing demand to continue, which does encourage future sales growth. However, the issue is that expectation that the inventory shortage will improve this year, suggesting continued price increases. While it may not be solved this year, the sooner labor and effort is invested in building and providing new homes, the sooner the housing sales growth will adjust to better match the wage growth.

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