Residential housing is robust again, perhaps even bubbly. But instead of threatening to inflict another economic collapse on the U.S., rising home prices in fact may be reflecting a lopsided market — where the wealthy are ensconced in cities that are mostly unaffordable to everyone else.
Ineed, it appears that inequality and lack of demand for cheaper homes characterize the housing market nowadays.
First, a comparison between median home prices and median household income shows that one year’s worth of income buys as small a percentage of a house (less than 20%) as it did at the peak of the bubble.
But comparing median income to the median sales price, though important, may not reveal all the nuances of the market. For example, according to a recent report from the Urban Institute (UI), the housing market looks healthier in that total housing equity now exceeds total housing debt, $13.2 trillion to $10 trillion. By contrast, from late 2006 through mid-2012 debt had exceeded equity.
Affordability is defined as the maximum affordable price is the house price that a family can afford putting 20% down, with a monthly payment of 28% of median family income, at the Freddie Mac prevailing rate for 30-year fixed rate mortgage, and property tax and insurance at 1.75% of housing value.
In fact, the data show unaffordability in 13 of 37 MSAs (Metropolitan Statistical Areas). And, according to a Zillow report using data from Harvard’s Equality of Opportunity Project, the worst affordability is in areas that historically have given parents the best opportunities to ensure better futures for their children. According to Zillow, “home values have increased sharply in the very same metro areas that offer a path to a prosperous future — and incomes have not kept up.”
So powerful is the return on real estate that a recent Brookings Institution paper refuting the thesis of controversial economist Thomas Piketty (that greater return accrues to capital rather than to labor), allowed for an exception in residential real estate as an asset that has appreciated meaningfully.
The Brookings paper didn’t focus on where real estate has appreciated the most. But from 2004 through 2015, real estate appreciated by 21% in the most expensive zip codes, and by 13% in the bottom 90% of zip codes.
The price disparity in housing between the high- and low ends of the housing market is as large as it’s been since World War II. So while it’s unlikely there’s another debt-fueled real estate crisis that will tank the global economy, real estate now reflects a different set of problems.