Bubble Trouble? Prices Outpace Wages

Over the past two years, home price appreciation has outpaced wage growth in 76 percent of U.S. housing markets and appreciation nationwide has outpaced wage growth by a 13:1 ratio, but the price hikes have been fueled by non-traditional buyers like investors and international buyers, according to a new RealtyTrac study.

Wages up 1.3 percent, home prices up 17 percent during housing recovery

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.

Despite the rapid increase in home prices, most markets are still affordable by traditional standards. Of the total 184 markets analyzed, 135 (73 percent) with a combined population of 143 million had a median home sales price in December that required less than 28 percent of median income for monthly mortgage payments, including property taxes and insurance.

“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.

“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.”

For the report RealtyTrac analyzed growth in average weekly wages from the Bureau of Labor Statistics and median home prices derived from sales deed data in 184 metropolitan statistical areas nationwide with a combined population of nearly 228 million, comparing 2014 to 2012 numbers.

Home price appreciation outpaces wage growth in 76 percent of markets

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).

“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.

Wage growth outpaces home price appreciation in 24 percent of markets

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.

 

Top 25 metros with highest rate of home price appreciation

Metropolitan statistical areas with the highest rate of home price appreciation during the two years ending in December were Detroit (up 57 percent), Salinas, California (up 49 percent), Myrtle Beach, South Carolina (up 47 percent), Houma-Bayou Cane-Thibodaux, Louisiana (up 45 percent), and Modesto, California (up 44 percent).

Other metro areas among the top 25 for highest rate of home price appreciation in the two years ending in December 2014 included San Francisco, California (up 39 percent), Atlanta (up 38 percent), Houston (up 37 percent), Sacramento, California (up 37 percent), San Jose, California (up 33 percent), and Memphis (up 33 percent).

Top 25 metros with highest rate of wage growth

Metropolitan statistical areas with the highest rate of wage growth in the two years ending in the second quarter of 2014 were Gulfport-Biloxi, Mississippi (up 13.2 percent), Naples-Marco Island, Florida (up 9.2 percent), Houma-Bayou Cane-Thibodaux, Louisiana (8.9 percent), Manchester, New Hampshire (8.4 percent), and San Jose, California (8.3 percent).

Other metro areas among the top 25 for the highest rate of home price appreciation in the two years ending in December 2014 included Madison, Wisconsin (up 8.1 percent), San Francisco (up 7.1 percent), Tulsa, Oklahoma (up 7.0 percent), Provo, Utah (up 7.0 percent), and Albany, New York (up 6.4 percent).

Report methodology
Using Bureau of Labor Statistics average weekly wage data, RealtyTrac looked at average weekly wages in the second quarter of 2012 (the most recent data available at the time of the analysis) compared to the second quarter of 2014. Data on national wages is from the Bureau of Labor Statistics and is based upon median wages while MSA level data is based upon average wages.

For home prices RealtyTrac looked at the median home sales prices derived from sales deed data in December 2014 compared to December 2012 based on the hypothesis that a change in average wages would take at least six months to impact home prices. For non-disclosure states list median home prices were used instead of sales deed data. In calculating average house payments, fixed mortgage rates were obtained from Freddie Mac in June of every year. It was assumed that the average borrower would make a 10 percent down payment on a property that sold for the median home price, the mortgage term would be 30 years, and insurance combined with property tax would be 1.39 percent of the value of the home.