Is the Current Housing Market an Affordability Bubble?

by James SheaSeptember 4, 2018

While the 2008 housing market crash was complex, a key factor was mortgage-backed securities and subprime mortgages. The mortgage market financed too many people who couldn’t afford a mortgage, causing a collapse in the bond market. The downturn in the bond market forced Lehman Brothers into bankruptcy, and that sent the mortgage and real estate markets into a tailspin. Thousands of homes were forced into foreclosure, and homeowners lost significant amounts of equity. It took years for the housing market to recover.

Figurine of a wooden house with a large doorway on a background of black boards.

Many people are concerned about something similar occurring to the current housing market. The housing marketing is showing signs of a bubble, but this time, the financial markets aren’t the primary culprits. Rising interest rates and an overpriced housing market are the red-handed bandits that are going overlooked. It’s an affordability bubble.

“I think the market still has legs, but if rates continue to rise it will price out entry-level buyers and they have been carrying the market the last few years,” said Sam Khater, chief economist at Freddie Mac.

Prices soar in many markets

Housing prices today are 11% over where they were before the peak of the crash and have increased 52% from the lows after the crash, according to the S&P/Case-Shiller U.S. National Home Price Index Some markets are up considerably more.

While housing prices continue to grow and the economy remains strong, wage growth has not kept up. Wages are only growing at a 2.7% rate, down from 2.9% two years ago.

As a result, many people are getting priced out of the market, and the market is beginning to reflect that reality. In July, existing home sales declined for the fourth straight month, and some real estate professionals are starting to report signs of weakening consumer demand.

“I don’t think the recovery is over,” Khater said. “Economic growth is still very strong and essentially running at capacity. However, the consistent decline in housing affordability means there are fewer consumers who can afford to purchase a home.”

Lack of affordable housing

Part of the problem is a lack of new housing, especially affordable housing for first-time homebuyers. Many people in their 20s and 30s have begin to enter the housing market after the crash and are looking for a first-time home. They are starting a family and want the stability of owning a home. According to recent data, between 2014 and 2017, the housing market saw a 40 percent increase first-time homebuyers.

During the recovery period, however, most home builders focused on the high-end market. They have built larger homes and luxury condominiums. That has left a small number of properties for sale on the lower end of the market, and a large number of buyers. The trend is pushing prices for entry level-homes higher, and people are being priced out of the market.

Saving money concept and hand putting money coin in the glass jar for financial and accounting concept.

And just as the market is starting to get soft, construction companies are seeing a drastic increase in construction costs. The increased costs are driven by a lack of skilled construction workers and higher material costs due to the recently enacted trade tariffs. That has led some builders to shutter projects in high-priced markets like San Francisco.

“Builders need to manage rising construction costs to keep their homes competitively priced for the newcomers to the housing market,” said Danushka Nanayakkara-Skillington, senior economist at the National Association of Home Builders. “While affordability conditions remain positive and the labor market sees low unemployment, prospective home buyers face increased uncertainties as interest rates trend higher and trade war concerns grow.”

Affordability bubble

The trend has pushed homeowners out of the reach of many Americans, and caused people to pay more than they can reasonably afford. For existing homes, the median price climbed in June to a record $276,900, while properties typically stayed on the market for 26 days, unchanged from the prior three months, according to the National Association of Realtors.

“Affordability is becoming a major headache for homebuyers,” said Lawrence Yun, the association’s chief economist. “You are seeing home sales rising in Alabama, where things are affordable. But in places like California, people aren’t buying.”

A row of a new houses.

Pending home sales were down in July in South and the West, but increased in Northeast and the Midwest. The trend could show the first significant turn in the housing in the post-crash years.

Multiple years of inadequate supply in markets with strong job growth have finally driven up home prices to a point where an increasing number of prospective buyers are unable to afford it,” Yun said.

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About The Author
James Shea
James Shea is an award-winning journalist and author. He owns Media Lab, a content marketing and search engine optimization company is Richmond, Virginia.