NAR: Explosive Growth in Home Prices “Not Sustainable”
By Maggie Wilson @ Real Estate Daily
July 2, 2018

Home values have been exploding for almost a year now, but income growth is falling dangerously behind. Lawrence Yun, the chief economist at the National Association of Realtors, said that the current trajectory of price growth compared to income growth is “simply not sustainable.”

Elevated home prices, rising mortgage rates, and low supply are creating more affordability issues for consumers. Housing demand remains strong, however, on the back of a healthy economy with low unemployment, meaning people are eager to buy but don’t have the income to match their ambitions.

Key Takeaways

  • Since 2012, home prices have increased 48% while wages have only increased 14%
  • The average 30-year fixed-rate mortgage is a full percentage point higher than it was eight months ago
  • Housing supply is most scarce at the low end of the market, driving prices out of range for many first-time buyers
Source: CNBC


Home values have been rising for six straight years, and the gains have been accelerating for the past two years. Unlike the last housing boom, the gains are not driven by fast and easy mortgage money, but instead by solid buyer demand and very low supply. Still, like the last housing boom, some are starting to warn these price gains cannot continue.

“The continuing run-up in home prices above the pace of income growth is simply not sustainable,” wrote Lawrence Yun, chief economist for the National Association of Realtors, in response to the latest price reading from the much-watched S&P CoreLogic Case Shiller Home Price Indices. “From the cyclical low point in home prices six years ago, a typical home price has increased by 48 percent while the average wage rate has grown by only 14 percent.”

Yun also pointed to rising mortgage interest rates as a factor that would weaken affordability. The average rate on the 30-year fixed mortgage is nearly a full percentage point higher today than it was at its most recent low in September 2017.

Some argue that despite weakened affordability, demand is just so strong that it can support higher home prices. Improving economic factors are seeing to that.

“A generally strong economy and favorable demographic tailwinds driven by the huge millennial generation aging into their home buying prime will help ensure that demand stays high, even as prices rise,” wrote Aaron Terrazas, senior economist at Zillow. “Getting a mortgage remains incredibly affordable compared to paying rent each month.”

But he admits that the “advantage is starting to erode, as mortgage interest rates rise alongside prices and income growth lags behind.”

Meanwhile the home price gains are widest on the low end of the market, where supply is leanest. That is why home sales have been dropping most on the low end. Evidence is now mounting that a growing number of first-time buyers are giving up and dropping out of the market altogether. Sales to first-time buyers dropped 2 percent in the first quarter of this year compared with the first quarter of 2017, according to Genworth Mortgage Insurance.

View the original article at CNBC