We’ve all heard about buyers’ fears of being priced out of the market, but are these fears overinflated? Do the number support this fear or is something else going on? A recent story in the New York Times indicated that historical records suggest that these fears are generally exaggerated.
Cities with steep price increases today will probably have much smaller upticks in the future. And for the most part, differences in price increases among cities are well explained by short-term variations in employment growth.
This is not rocket science. When businesses in a city have an unusually successful year and hire a lot more people, new employees arrive, but initially there aren’t enough homes for them. Home prices rise immediately so that demand effectively equals the existing supply, inevitably causing ripple effects. Someone with a new, high-paying job will outbid someone else, who will have to lower her sights and accept a less attractive house. People much further down the ladder will end up living with their parents or with roommates.
On a national scale, this suggests that weak employment growth of the kind shown in May’s jobs report, with only a 38,000 increase in nonfarm payrolls, could eventually hurt home prices across the country. That’s possible. But even without a national price slowdown or decline, there is reason to believe that double-digit increases won’t continue for long in individual cities. Short-term variations abound, but for the most part, the differences in long-term home price increases in individual cities are about plus or minus one percentage point annually. (Exceptions include San Francisco and Portland, whose home prices have grown almost two percentage points above average annually since 1987.)
Cities with big home price increases recently have issued more building permits per capita. This supply response has the potential to reverse at least some of the prices: When housing supply increases, it tends to bring high real estate prices down, though that takes time.
As their disposable income has grown relative to home prices, individuals have bought more housing. That’s partly why average household size declined to 2.5 people in 2015 from 2.9 in 1975. The percent of households consisting of a single person rose to 28 percent in 2015 from 20 percent in 1975. There are other explanations for this, but one is certainly that housing has been getting cheaper, relative to income, so we are consuming much more of it.
New homes are larger: Median floor space has risen to 2,169 square feet in 2010 from 1,525 in 1973, census data shows. This large increase generally holds within major metropolitan areas and outside them. While living space is constrained in the heart of large, high-priced cities like New York, builders elsewhere have usually been able to accommodate people’s demands for cheap large homes roughly where they want them.
Given these facts, why do people still worry that home prices are getting out of reach? The answer can’t be found in the housing data. Instead, these fears may reflect anxieties about other issues — like income inequality, globalization and the threat of job losses because of robots and artificial intelligence. In prosperous cities, rising prices may connote economic exclusion.
After all, American society is increasingly divided according to educational attainment and income. In some circles, rarefied home prices may set off worries about being unable to live in choice locations shared with successful people. Home prices may, unfortunately, be viewed as a measurement of success in life rather than merely of floor space, and fear of being priced out of housing may well be rooted in deeper broodings about maintaining a position in the social hierarchy.
Are you currently working with a buyer who fears they are priced out of the market? We’d love to hear from you.
Read the full article here.