If there is one chart that most clearly captures the unsustainable US home price appreciation bubble, it is the following which was released overnight from RealtyTrac: it is based on an analysis of wage growth and home price appreciation during the U.S. housing recovery of the past two years and has found home price appreciation has outpaced wage growth in 76 percent of U.S. housing markets during that time period. The conclusion: home price appreciation nationwide has outpaced wage growth by a 13:1 ratio!
Some of the other RealtyTrac report's findings:
“Home prices in many housing markets across the country found a floor in 2012 and since then have rapidly appreciated, particularly in markets attracting institutional investors, international buyers or some other flavor of cash buyer not constrained by income as much as traditional buyers,” said Daren Blomquist, vice president at RealtyTrac. “Eventually, however, those traditional buyers will need to play a bigger role in the housing market for the recovery to maintain its momentum.
What goes up, unsustainably, must come down, or at least hold it growth until wage growth finally picks up.
“Those markets with the biggest disconnect between price growth and wage growth during the last two years are most likely to see plateauing home prices in 2015 until wages catch up,” Blomquist continued. “Meanwhile, markets where wage growth has outpaced home price appreciation during the last two years are poised to see at least steady growth in home prices in 2015 in most cases.”
The math is well known to frequent readers. Nationwide, median wages have increased 1.3 percent between the second quarter of 2012 –when home prices bottomed out and started rising again — and the second quarter of 2014. Meanwhile home prices have increased 17 percent in the two years ending in December 2014, outpacing wage growth by a 13:1 ratio.
Among the 184 metro areas analyzed, the average wage growth over the two years ending Q2 2014 was 3.7 percent while the average home price appreciation in the two years ending in December 2014 was 13.4 percent.
Where it the appreciation imbalance the biggest? Home price appreciation outpaced wage growth in 140 of the 184 metro areas (76 percent) with a combined population of 176 million. Metropolitan statistical areas with the highest ratio of price appreciation to wage growth included Merced, California (141:1), Memphis, Tennessee (99:1), Santa Cruz, California (94:1), Augusta, Georgia (78:1), and Palm Bay-Melbourne-Titusville, Florida (62:1).
Other metro areas where home price appreciation has outpaced wage growth by a wide margin during the housing recovery included Sacramento, California (17:1 ratio), Riverside-San Bernardino, California (15:1 ratio), Las Vegas, Nevada (14:1 ratio), and Detroit (12:1 ratio).
“As wage growth remains fairly flat across the Ohio markets, the effects of low available inventory continue to escalate prices, creating a negative effect on home affordability for many first time, and move up home buyers,” said Michael Mahon, executive vice president at HER Realtors, covering the Ohio markets of Cincinnati, Dayton and Columbus, the latter of which has seen home price appreciation outpace wage growth by a ratio of 9:1 during the housing recovery. “While the time to purchase is now, for home buyers to take advantage of all time low interest rates, continued stress on home affordability and credit repair shall leave many missing this prime time opportunity of home ownership.”
Among the 140 markets where home price appreciation has outpaced wage growth during the housing recovery, 45 metro areas (32 percent) with a combined population of 63 million had a median home price in December that required more than 28 percent of the median income for monthly mortgage payments — unaffordable by traditional standards.
These 45 traditionally unaffordable markets with price appreciation outpacing wage growth included Los Angeles, San Francisco, San Jose and San Diego in California, Seattle, Portland, Boston and Denver.
“The good news in Seattle is that we have higher than average income growth. The bad news in Seattle is that homes are becoming increasingly less affordable, especially in the core areas near the city,” said OB Jacobi, president of Windermere Real Estate, covering the Seattle market. “While wages in Seattle are expected to continue rising at a healthy pace, so too are housing prices. And as long as buyer demand outpaces seller supply, it is unlikely that we will see any improvement in affordability in the foreseeable future.”
“Marketing homes in areas that have home ownership costs continually outpacing wage growth means that you run into more people leaving areas for their next move, up or down,” said Mark Hughes, chief operating officer at First Team Real Estate, covering the Southern California market. “The dynamics driving the affordability, or lack of affordability, have as much to do with the new global nature of real estate as much as they have to do with the speed of local wage acceleration. Southern California will remain increasingly unaffordable from within, but a hot commodity world-wide.”
It's not all doom and gloom for homeowners: Wage growth outpaced home price appreciation in 44 of the 184 metro areas (24 percent) analyzed with a combined population of 51 million. Metropolitan statistical areas with the lowest ratio of home price appreciation to wage growth were Hagerstown-Martinsburg, Maryland-West Virginia, Wichita, Kansas, Des Moines, Iowa, Gulfport-Biloxi, Mississippi, and Harrisburg, Pennsylvania.
Other metro areas where wage growth outpaced home price appreciation during the housing recovery included New York-Northern New Jersey-Long Island, New Haven, Connecticut, Virginia Beach, Tulsa, Oklahoma, and Raleigh, North Carolina.
Of course, the biggest determinant of home price appreciation over the past 2 years has nothing to do with US consumers, or household formation, as confirmed by the collapse in first-time homebuyers or the unprecedented depression in new mortgage origination, and everything to do with what we first suggested is one of the main drivers of the US housing bubble - foreigners parking their illegally procured cash in the US and evading taxes, now that US housing, with the NAR's anti-money laundering exemption blessing, is the new normal's Swiss Bank Account. That and flipping homes from one "all-cash" buyer to another "all-cash" buyer in hopes of a quick capital appreciation and the constant presence of the proverbial dumb money.
Until it is made overhwlemingly costly for illegal offshore wealth to be parked in NYC triplexes, or home flipping is regulated out of existence, expect the housing bubble to continue rising to even more eyewatering highs.