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The Affordability Problem: New Home Demand Hinges on Wage Growth

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Housing affordability has been a persistent issue in many real estate markets across the country since the housing crisis. With household income lagging and home prices continuing their upward climb, fewer buyers are able to afford a home in today's housing market.

The January 2016 Employment Summary from the Bureau of Labor Statistics showed that wage growth, which has lagged in recent months, jumped by 12 cents over-the-month in January up to $25.39 and by 2.5 percent since the previous January.

Perhaps even more wage growth could be coming to help buyers with affordability issues, according to a new report from John Burns Real Estate Consulting. The report said that "incomes should rise steadily over the next few years due to demand for high-income workers and a shortage of workers overall."

The report stated that many middle-class buyers can no longer afford a new home due to the following factors:

  • Price/income. Home price to median income ratios exceed the historical average for all 20 of the largest housing markets in the country.
  • Payment/income. Payment to income ratios exceed the historical average in the majority of the 20 largest housing markets in the country.
  • New home prices. New home prices exceed resale home prices by record levels, and not just because new homes are larger and better located than usual.
  • Anticipation of rising rates. Bond markets currently assume that long-term rates will rise over the next few years, putting additional upward pressure on home prices.

"Job growth remains healthy in most markets, especially in high-income jobs. High-income job growth has recently emerged as a primary driver of new home demand, particularly in higher-priced markets," John Burns noted. "Nationwide, high-income jobs are up 2.6 percent year over year. However, growth in high-income sectors has played out very unevenly across the major metros."

San Jose, California experienced the most high-income job growth, with a 8.2 percent year-over-year increase. The city has 343,800 total high-income jobs, up 26,000 from last year. Austin and Riverside-San Bernardino took second and third place with a year-over-year increase in high-income jobs of 6.4 percent and 5.1 percent, respectively.

John Burns stated that they "have more confidence in the markets with strong high-income job growth, and become cautious if those growth trends begin to slow."

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Source: John Burns Real Estate Consulting

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