Great piece from Citylab this morning:
Housing prices are cooking. Across the nation, the price of homes is rising faster than the rate of inflation—in some places by a factor of three. That’s true of high-cost cities such as Seattle and San Francisco and lower-cost cities such as Charlotte and Tampa alike. And the overheated market for homes is costing the middle class the American dream.
Nationwide, the price for homes is approaching the zenith seen in 2006, just before the market fell into a foreclosure crisis and the economy sank into the Great Recession. No major city appears to be spared from these rising temperatures. New highs or near highs in Los Angeles and Washington, D.C., are mirrored by similar (relative) highs for Cleveland and Chicago.
But there are key differences between the housing peak in 2006 and the housing peak today. This surge in housing prices is not necessarily evidence for a bubble—much less any indication that a bubble is about to burst. Understanding the difference is critical to knowing how high housing costs may affect the economy going forward.
Late in July, the S&P CoreLogic Case–Shiller U.S. National Home Price NSA Index tracked a 6.4 percent annual gain in home prices for May 2018. This index has recorded year-over-year increases of at least 5 percent every month since August 2016—a sign of the strength of the recovery. Len Kiefer, deputy chief economist for Freddie Mac, shared a visualization for these data; in Seattle, which saw a year-over-year price increase of 13.6 percent for May, home prices are already well above the 2006 high-water mark.
But since most workers aren’t earning 6 percent raises year after year, eventually this party has to come to an end. (Indeed, for four-fifths of privately employed workers, wages are actually falling.) Housing prices will stabilize or soften because they have nowhere else to go. The prevailing trend is unsustainable. “If something can’t go on forever, sooner or later it will end,” says David Blitzer, managing director for S&P Dow Jones Indices. With mortgage rates and prices rising, sales in both new homes and existing homes are starting to slow. “Either buyers have gone for the summer, because it’s too hot to look at housing, or they’re pausing to see what’s going on,” Blitzer says. “If the pause continues, you’ll see sales go down.”