Home prices are rising 13 times as fast as Americans’ wages — bad news for renters who aim to own their own places and sellers who want property values to keep going up.
"Homeownership is getting further out of reach for the average wage earner in America," says Daren Blomquist of RealtyTrac, which recently analyzed median wage and home-price growth between 2012 and 2014.
The firm found that while the typical worker’s earnings inched up just 0.3% during the period, median home prices shot up 17%.
Blomquist says that’s particularly bad news for renters who hope to switch eventually to homeownership. "If buying a home is out of reach, that takes away one of the most tried-and-true wealth-building mechanisms that Americans have," he says.
RealtyTrac attributes the problem to wages that haven’t snapped back from the Great Recession nearly as much as home prices have.
Blomquist says that when property values bottomed out around 2012, investors and well-heeled consumers looking for homes to live in rushed in with either all-cash offers or big down payments. Neither type of buyer had to worry about earning enough money to cover mortgage bills, so they pushed home prices up faster than local wages grew.
"This recovery has been driven not by the hoi polloi, but by cash-rich buyers and investors who haven’t been constrained by income," Blomquist says.
RealtyTrac measured earnings changes by looking at U.S. Bureau of Labor Statistics average weekly wage data for 2012 and 2014’s second quarters, the latest periods with figures available at the time the firm conducted its study.
For home-price changes, RealtyTrac compared public property records from across America for residences sold in December 2012 and December 2014. (Researchers deliberately analyzed prices from a period six months later than the BLS data because changes in earnings typically take that long to affect the housing market.)
Blomquist says the disconnect between home-price and wage changes doesn’t affect every part of America, but has affected 140 of the 184 metro areas RealtyTrac studied. That’s 76% of the total.
The firm uncovered the biggest divergence in the Central California community of Merced, a metro area some 130 miles southeast of San Francisco.
Merced faced plummeting home prices and tons of foreclosures during the housing bust, but median home prices rebounded a sharp 42.2% between 2012 and 2014. Unfortunately, the typical local wage grew only 0.3% — meaning property values increased an astounding 140.6 times faster than earnings.
Phillip May, president of the Merced County Association of Realtors and a real estate agent with London Properties, says local home prices "dropped too far when the foreclosures hit, and now they’ve overcorrected back upward."
At the same time, workers in the metro area’s key local-government sector have had few if any raises for years because the housing bust decimated the region’s property tax base, he says. "I know lots of police, firefighters, teachers and other people with city and county jobs who are just getting their first increases in quite a while," May says.
Other markets that RealtyTrac found have a big dichotomy between home-price and wage increases include Memphis, Tenn., (a 98.7-to-1 ratio) and Santa Cruz, Calif. (a 93.6-to-1 rate).
On the flip side, the firm found 44 markets where median wages actually grew more than local home prices.
Some of the best performers include Hagerstown, Md., (no price gains vs. 2.5% higher wages) and Wichita, Kan. (no price appreciation, but 2% median-wage gains).
Despite such bright spots, Blomquist says housing "is at a critical moment. A lot of markets are still affordable, but are about to tip over into unaffordability if this pattern continues."
He expects the mismatch between wages and prices to drive future property value increases way, way down. "I think the likely scenario in most markets will be that over the next couple of years, home-price appreciation will either flatten out or become very slow," the expert says.
This article was republished with permission from TheStreet.