Trends To Threats
In a recent article, we spoke about residential regressionÂ and the current impact on the housing market. Unfortunately it doesn’t stop there.
Recently there has been talk ofÂ trends that are negatively impacting the housing market, which could also be counted as another reason for the residential regression from our previous post.
Despite the household growth over the past three years and the initiative taken by milleninials along with the recovery of the recession lows, under the surface of the housing market there is a real threat enroute that will plunge us back into the depths of housing instability.
Rising Housing Costs
First and foremost, the main thing everyone knows about because most everyone is having trouble with it, is the rising in housing costs. This covers homes as well as renting locations.
According to the latest news from Joint Center for Housing Studies at Harvard University State of the Nation’s Housing, the cost of housing has shot past the manageable income for most home owner’s and renters, to the point where almost one-third (equating to 38 million) U.S. households are cost burdened. This means that these households pay 30% or more of their incomes for housing in 2016. Worse yet, 47% of renter households (28.8 million) are cost-burdened, with over half paying more than 50% of their incomes for housing alone.
The price for a typical home in 2017 was more than four times the median income, which is significantly greater than in 1987 when it was just barely over three times the median income (which is still difficult).
Crawling Wage Growth
Despite the recent growth in recent years of wages, it has not compared to the inflation that has occurred in the housing market. The real median income of households in the bottom quartile has had a minuscule increase of 3% between 1988 and 2016, while the median income for adults between the ages of 25-34 rose by only 5%.
Now comparing those increases to the median home price increase of 41% faster than inflation between 1990-2016, should paint a devastating picture. As for the median rent, there was a 20% faster growth. As a result of such events, 2.5 million rental units priced below $800 serving housholds earning up to $32,000Â annually were lost between the years of 1990 and 2016.
Inequality, Seniors and New Housing
Recently reported from the National Low Income Housing Coalition, there is not a single state, county or metropolitan area in the entire United States where a full-time worker earning the federal minimum wage of $7.25/hour can afford a modest two-bedroom apartment. In order for them to afford such an apartment, they would need three times as much, or $22.10, for a modest two-bedroom apartment.
As mentioned by the real estate analyst John BurnsÂ the problem lies in the diminishing middle class, which in turn diminishes the 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.”
Senior Households increasing at a faster rate than MillennialsÂ
Back in 2012-2017 millennials formed an average of 2.1 million new new households annually. However despite that, they’re forming fewer households than older generations. Through the past 10 years, older households have skyrocketed in numbers by growing over 7 million, changing the ratio from one in five households to one in four. So far it is estimated that by 2035, one out of every three households will be at least 65 years old. As the older homeowners are relocated to care facilities or pass on, eventually there won’t be enough buyers for senior homes due to younger household formations not keeping up.
New housing, Same Problem
New projections have estimated that household growth will be at a rate of 1.2 million per year between 2017-2027. As for single-family construction, there has been a consistent low running performance, staying below the annual average of 1.1 million units for at least the last ten years.
Homebuilders are struggling to keep up. Single-family starts have risen 8.6% to 848,900 units while permitting has increased in 78 of the 100 largest metros. However due to the higher cost of materials, new homes are priced higher than existing homes, making new home construction that much more of a difficult possibility. In April 2018, the median price of new homes sold was $312,400 which is larger in comparison to the median existing-home price of $257,900.
There was a recent tick however in the national rental vacancy rate, rising slightly from 6.9% to 7.2%. This increase was concentated among newer and higher-cost units, suggesting a foreboding future.
The National Association of REALTORS reported that housing sales volume has dropped for the last two months. The prices however are at a 74-month high, and sales percent is 1.4% below what is was a year ago.
Things are looking a little bit shaky, however no matter the case, we all must strive forward the best we can.
What do you think about these recent changes in the housing economy?
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