Household growth has increased over the last three years, millennials are stepping up, and home prices have recovered from recession lows. So what is there to worry about? Not much on the surface, but there are some emerging trends that suggest good times won't continue for much longer in the housing market.
Rising housing costs
The price of a typical existing home sold in 2017 was more than four times the median income, compared to just over three in 1987.
Tepid wage growth
While there's been growth in wages in recent years, it hasn't kept up with inflation, and certainly hasn't kept up with housing. The real median income of households in the bottom quartile increased only 3 percent between 1988 and 2016, while the median income for adults aged 25 to 34 rose by just 5 percent.
Meanwhile, the median home price grew 41 percent faster than inflation between 1990 and 2016, the median rent grew 20 percent faster. Adding insult to injury, 2.5 million rental units priced below $800 serving households earning up to $32,000 annually were lost between 1990 and 2016.
A new report from the National Low Income Housing Coalition attests that there's not one state, county or metropolitan area in the entire United States where a full-time worker earning the federal minimum wage of $7.25 an hour can afford a modest 2-bedroom apartment. They need three times that amount, or $22.10 to afford a modest two-bedroom rental.
According to real estate analyst John Burns, the problem is the shrinking middle class, which is diminishing demand for median-priced housing. "Among households headed by those under age 65, middle-income households plunged from 57% of American households in 1970 to only 45% today - a decline of 12%. The result has been a 7% increase in the percentage of households who earn more than double the US median income, from 12% in 1970 to 19% in 2016 and a 4% increase in the percentage of households who earn less than 80% of the US median income, from 31% in 1970 to 35% in 2016."
<p>Senior Households increasing faster than Millennials
Millennials formed an average of 2.1 million net new households annually in 2012–2017, but despite being larger in numbers, they're forming fewer households than older generations. Over the past 10 years, the number of older households grew by over 7 million, rising from one in five households to one in four. By 2035, one out of every three households will be at least 65 years old. As the oldest homeowners move into care facilities or pass on, there eventually won't be enough buyers for senior homes because younger household formation hasn't kept up.
New Housing Still Underperforming
New JCHS analysis projects household growth at a rate of 1.2 million per year between 2017–2027. Single- family construction, however, has remained well below the long-run annual average of 1.1 million units for at least ten years.
Homebuilders are trying to keep up. Single-family starts rose 8.6 percent to 848,900 units while permitting increased in 78 of the 100 largest metros, but because of the higher cost of materials, new homes are priced higher than existing homes. In April 2018, the median price of new homes sold was $312,400, compared to the median existing-home price of $257,900.
And for the first time since 2009, the national rental vacancy rate rose, ticking up from 6.9 percent to 7.2 percent. Most of the increase was concentrated among newer and higher-cost units, which suggests the party could be about to end.
The National Association of REALTORS® reported that housing sales volume has fallen for the last two months. While prices are at a 74-month high, sales volume is 1.4 percent below a year ago.
While it's early to call a housing recession, the indicators are being felt. Home prices, affordability, household formation, wages, rental, existing and new home performance are all categories to watch going forward.