Following the 2008 housing crisis and subsequent recession, the American real estate market has seen a drastic improvement in prices. In March 2017, home prices in the United States increased at the strongest rate in three years. The S&P CoreLogic Case-Shiller U.S. National Home Price Index, which covers all nine U.S. census divisions, saw an increase in prices of 5.8 percent. Furthermore, home prices across the U.S. hit a 33-month high. Seattle experienced the highest gains, with a 12.3 percent year-over-year price increase, followed by Portland and Dallas. Housing prices have experienced an increase in almost all American cities, and in several cases, have surpassed pre-recession prices. Higher housing prices have hit buyers hard, who are faced with fewer options at higher prices.
A steady job market has increased demand among potential homebuyers. However, the real estate market is experiencing a dwindling supply of houses. Excess demand and insufficient supply have resulted in increased housing prices, particularly in metro areas. According to the National Association of Realtors, the number of homes sold during the first quarter of 2017 fell to the lowest level since the housing market began to recover in 2012. In February 2017, there were only 161.1 homes for sale per 1,000 households. Sales listings fell 9 percent in 2016, to 1.93 million. Several experts argue that the problem is poorly priced inventory, instead of lack of it. They believe that incorrect pricing makes potential homeowners believe there is insufficient inventory, when in reality; there is plenty of it. The National Association of Home Builders has estimated that the tariff on Canadian lumber imposed by the Department of Commerce could lead to higher prices for new homes and a decline in investment in new construction.
The Federal Reserve is not directly responsible for setting mortgage rates. Instead, mortgage rates are tied to the government’s 10-year Treasury notes. The Fed hiked interest rate on Treasury note in March 2017, resulting in a tough market for buyers. According to Freddie Mac, the interest rate on 30-year fixed mortgage increased to 4.09 percent in 2017 when compared to 3.97 percent in 2016. The recent rate hike might not be a dealbreaker for potential homeowners. However, the interest rate on Treasury notes is expected to rise in a tighter monetary policy environment. This could make owning a house unaffordable to millions of Americans.
Home values are rising at more than double the pace of average hourly earnings. In fact, home prices are outpacing earnings in nearly two-thirds of American cities. A study conducted by RealtyTrac, the leading source for comprehensive housing data, analyzed the median home prices and wage data from the Bureau of Labor Statistics in 456 counties across the country. The study created an affordability index, which was based on the percentage of average wages required to fulfill the monthly housing obligation for a median priced home and 3 percent down payment.
The study found that from the 456 counties analyzed, 9 percent of the counties (43 counties) had an affordability index of less than 100, during the first quarter of 2016. The finding implies that purchasing a house was less affordable when compared to the historically normal level of that county. The study also found that an average worker had to spend 30.2 percent of his or her paycheck on property taxes, mortgages and insurance premiums for a median-price home costing $199,000, during the first quarter of 2016. However, in the first quarter of 2015, an average worker had to spend 26.4 percent of their monthly wages to purchase a median-priced home. Furthermore, in 2016, the annual change in median home prices outpaced annual change in average weekly earnings, in 61 percent of the counties (276 of 456). In U.S. cities, the affordability crisis is not only about purchasing new homes. Since the Great Recession, rents in several metropolitan cities have increased dramatically.