Stagnant income growth, mounting home price and a low supply of homes are making home ownership less reasonable, according to the 2014 Zillow Home Price Expectation Survey, where 106 panelists including economists, real estate experts and investment and market strategists are asked to identify the primary cause of declining home affordability.
“Homes kept being more affordable than ever thanks to prices that were well off from their peaks and historically low interest that boosted buying power,” says Stan Humphries, chief economist at Zillow. However, in major metro areas, particularly in some California cities — including Los Angeles, San Francisco and San Jose — it is getting harder for the average U.S household to afford a home.
The issue is arising from relatively flat income growth compared to spike of home price. Strong demands on the back of an improving job market and great affordability led to rapid and unhealthy price spikes (5.2 percent) the past two years, but income growth has not kept pace with them. That causes buyers to spend an ever-larger share of their pay on housing than during prebubble years.
Experts also point high negative equity and low rates of new home construction as driving factors. “Almost one in five homeowners still remain underwater, which constricts the number of homes for sale and drive home values even higher,” Humphries says. In addition, affordable homes in the bottom tier (the bottom third of homes by value), which appeal to firsttime buyers, are three times more likely to be underwater than higher-priced homes, according to the Zillow Negative Equity Report.
Negative equity will be falling in compliance with home value growth, which is good, but it will remain a drag on the market for years to come as interest rates rise over the next few years, Humphries warns.
—Yena Lee
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