Incomes are accelerating faster than home values – how buyers and sellers are affected
By Erik J. Martin
What happens when wages grow quicker than what homes are worth? Good things for the real estate market, say the experts.
A recent report by Zillow indicates that earnings are now outpacing home values for the first time in five years: consider that, in 2015, incomes grew 5.3 percent and 5.4 percent for family and non-family households, respectively, versus a 5 percent annual growth rate for home values observed since the beginning of 2016.
“Strong income growth is undoubtedly a good thing for the housing market,” says Svenja Gudell, Seattle-based Zillow’s chief economist. “In prior years, home values were accelerating much more quickly than incomes, creating affordability concerns and a number of fast-moving markets, particularly among renters. The share of income needed to afford a home in these markets was growing as housing costs rose and incomes didn’t keep up – meaning there was less money to save or spend on other necessities. It’s critical that income growth catch up to home value growth to maintain equilibrium and keep housing affordable to a majority of Americans.”
Judy Mitchell, agent with William Pitt Sotheby’s International Realty in Southport, Conn., says incomes are increasing for a variety of reasons.
“Consumer confidence is growing, which, in turn, results in incremental growth across a variety of industries, translating to lower unemployment and more overtime pay,” says Mitchell. “Also, many millennials who could not get jobs after completing undergraduate education from 2009 to 2011 – after the housing bubble burst – decided to go to graduate school and ultimately land jobs that pay more.”
Elizabeth Norton, Mid-Atlantic managing research director for Washington, D.C.-based real estate firm Transwestern, agrees that rising income is positive news, as it could assist previously sidelined consumers in the home buying process.
“However, the median income adjusted for inflation remains 1.6 percent below the peak in 2007, before the recession hit,” says Norton. “Incomes still need to play catch-up before housing remains an option for many Americans, particularly those in lower-income brackets and pricey markets.”
In addition, continued low housing supply and high buyer demand complicates the real estate climate.
“Being able to afford a house is one thing – finding a suitable home to buy is another,” says Chris Ling, head of home buying and mortgages at NerdWallet in San Francisco. “There are still home inventory pressures that will likely take three to four years to stabilize. It’s going to take home builders that much time to get back to a normal pace of construction to meet growing demand.”
In the meantime, buyers, sellers and homeowners should pay close attention to market indicators.
“While the economy is bouncing back and people are making more money, home values are not improving precipitously, which impacts sellers when pricing their homes,” Mitchell says. “List prices need to be fairly close to the value at which a home will actually sell or you run the risk of chasing the market downward with price reductions. And buyers are reluctant to make low offers on overpriced homes because they fear overpaying.”
Gudell predicts positive outcomes for buyers and sellers in the wake of the Zillow report. “Critically, the share of income needed to afford a typical mortgage or rent payment will likely stabilize or could fall as income growth rises in tandem with housing costs, keeping housing relatively affordable. Additionally, more money in consumers’ pockets – thanks to bigger paychecks – may spur more people to consider moving into a larger home or help current renters save up enough money to make a down payment and buy a home.”
Consequently, home sellers should continue to see strong demand from would-be buyers, “although buyers should also expect to keep seeing fierce competition from their peers for those homes available to buy or rent, as inventory remains tight,” adds Gudell.
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