Home Price Surge and Stagnant Wages


image via Forbes
image via Forbes

The housing market has sent signals of accelerating home prices since the third quarter of 2015, a surprise amid the stressed-out stock market. Forbes contributor and National Association of Realtors chief economist Lawrence Yun analyzes the reason for this trend, and explains why a home price surge can not come at a worse time. Yun writes,

“This reawakening of home prices is coming at the wrong time, when stagnant wages persist, and hence it is cutting into housing affordability. Should mortgage rates rise – so far luckily the rates have been behaving with no real change since the Fed’s rate hike in December – then affordability will face even more challenges in the months ahead. A 100 basis points rise in rates (say from the current 3.8% to 4.8%) requires an additional 9% in monthly mortgage payments.

Why are the prices reaccelerating? It’s a simple case of insufficient supply to meet demand. At the end of December there were 1.79 million homes available for sale, down 3.7% from an already low level one year ago. Moreover, due to the higher-than-normal sales pace in December, when the weather was unseasonably warm, the supply-demand balance measure of months’ supply fell to 3.9 months. In other words, at the current sales pace, the entire inventory would be exhausted in 3.9 months, one of the thinnest levels of inventory recorded in the past 15 years. By comparison, a balanced market would correspond to around 6 to 7 months’ supply. When home prices declined during the market crash, the months’ supply was surging above 10 months.”