Statistically Speaking: Home Prices Outpacing Consumer’s Ability to Purchase

October 26, 2017  by Jane Chero in Economic News, Industry   

Table A shows the steady increase of both existing and new homes sales since the Great Recession. At a 98.5 index growth (2007 = 100), existing home sales continue to edge closer to pre-recession levels. Although still 21.8 percent shy of 2007 sales levels, new home sales have increased an average of 13 percent each year since 2011.

The National Association of Realtors projects the number of existing home sales will increase 2.6 percent this year and inventory tighten further in 2018 at 1.8 percent growth. (Figure 1)

Median Home Prices

The rapid rise of home prices shows no sign of slowing down (Table B). For existing home sales, prices have increased an annual average of 6.7 percent since 2011. The median price of existing homes at press time totaled $242,150 – up 11.8 percent from pre-recession prices. At year end, the National Association of Realtors (NAR) projected existing home prices will grow 5.2 percent this year compared to last then moderate slightly into the 3 to 4 percent growth range over the next two years (Figure 2).

New home prices have jumped by 28.7 percent since 2007 and have maintained an upward track post-recession (2011) – growing a yearly average of 5.8 percent and finishing the second quarter of 2017 with a median home price of $313,767 (Table B). Growth in the median price of new homes is expected to moderate in the last half of this year and the National Association of Realtors forecasts new home costs increasing over 3 percent next year (Figure 2).

As would be expected, regional variation in home prices are significant. As shown in Table C, at a median home price of $357,443 the West has the highest existing home sale prices. A lack of existing home inventory in the West is most likely causing prices to increase at such a high rate – up 22.5 percent from 2014 to 2017 Q2. The Northeast increased by 7.4 percent during the same time period, while existing home prices in the Midwest and South also showed great gains – growing 17.2 and 20.8 percent.

For new homes, the median price in the Northeast has skyrocketed up to $497,350 – a jump of 23.5 percent in 3.5 years. New home prices in the West actually declined by (-2.6) percent since 2014, while the Midwest increased 5.5 percent and the South by 8.6 percent.

Metropolitan cities, especially in California, are showing jaw-dropping price increases. Table D shows the top 10 most expensive cities to buy a home in 2017 Q2. The top 3 are California cities with San Jose-Sunnyvale-Santa Clara, CA topping out at $1,183,400.

The 10 metro cities increased an average of 7.7 percent in existing home sale prices over last year. Seattle-Tacoma-Bellevue, WA led the way in price hikes – jumping 13 percent from 2016 Q2.

On the flip side are the 10 metropolitan cities with the lowest median prices of existing homes this year (Table E). Youngstown-Warren-Boardman, OH-PA tops the list at a median price $87,000. A couple of these least expensive cities actually made big increases over last year – Decatur, IL is up 12.3 percent while Rockford, IL is up 12.4 percent.  

When the home building industry picked up after the Great Recession, so did the price of new homes. Before the recession in 2007, 64 percent of new homes sold for under $300,000. In 2009 at the bottom of the Recession, that number grew as high as 74 percent. Today only 45.7 percent of homes sell $300,000 and under. Since 2011, houses selling above $300,000 have steadily become the majority – up to 54.3 percent in 2017 YTD.

Median Income

Since the recession, median income has been unable to keep up with the escalation of home prices. Overall, median home prices have risen 28.1 percent from 2007 to 2016 – up to $313,700  (Table G). The growth of median income stalled with the recession and has slowly improved to $59,900 in 2016. According to ONS affordability data, median price paid for a home leapt 259 percent between 1997 and 2016, while earnings rose only 68 percent.

Housing Inventory

Along with rising home prices, low inventory has posed a problem for many home buyers wanting to upgrade housing or buy for the first time. Forecasters see little change on the horizon for existing home sales.  Although in a much higher price bracket, new home inventory has steadily increased over the last year – rising 16.5 percent from July 2016 to 276,000 homes in July 2017. In comparison, at a year-to-date inventory of 1.9 million homes, existing home inventory had a typical dip in the fall and winter but is still 9 percent lower from July 2016 to July 2017 (Table H).

Rental Prices and Vacancy Rates

 For many, home buying continues to be out of reach and with slower to grow rent prices, it is often the best option.

At a median monthly rental price of $1,414 in July 2017, rent has only increased by 2.1% since 2011 (Table J).

As shown in Table I, rental vacancy rates have dipped dramatically by 35 percent from 2009 to 2016. With an increase of 4.3 percent over the past year, the vacancy rate is at 7.2 year-to-date.

Housing Starts – Single and Family Units

The growth in new Single-Family unit housing starts will not let up anytime soon. Starts are projected to have double digit growth over the next two years.  However, Multi-Family unit housing starts (apartments) has fallen dramatically since the boom of 2014-2015 brought on by pent up demand and also the Millennials pouring into the rental market. Developers complain of long permitting and construction time spans also a lack of skilled workers. However, even though Multi-Family starts are projected to fall slightly next year, this reflects the apartment industry returning to a more realistic growth cycle (Figure 3). The challenge to growth in new home starts will be the affordability for first-time Millennial buyers, and current homeowners seeking to upgrade.