Are Stagnant Wages Dimming the American Dream of Home Ownership?

American Dream

Home prices are climbing more than twice as fast as earnings, making the American Dream of homeownership out of reach for many first-time buyers.

In many ways, the American Dream is stronger today than at any point since the financial crisis, as a rebounding labor market continues to underpin the economy. At the same time, first-time buyers simply aren’t making enough to keep up with surging home values, raising red flags about a segment of the market that has long underperformed other demographics.

Home values shot up 5.9% in March, according to the recently released Standard & Poor’s CoreLogic Cas-Shiller 20-city home price index. That represented the biggest increase since July 2014.

Property values are being driven higher by a pervasive short supply of available homes, combined with fewer construction projects than the market demands. Homebuilders have long struggled with labor shortages, rising costs and bureaucratic bottlenecks. These factors drove national house prices to 33-month highs, based on Case-Shiller data.[1]

Home prices are now rising more than twice as fast as wages, based on the latest jobs report from the U.S. Department of Labor. Average hourly earnings rose just 2.5% annually in May, following a similar increase the month before.

Sluggish wage growth has long been a source of concern for policymakers, who have done just about everything possible to re-inflate the economy after the subprime mortgage crisis. The Federal Reserve’s balance sheet swelled to $4.5 trillion after years of quantitative easing, while simultaneously making record-low interest rates the new normal.

A chronic supply shortage of homes for sale means competition for existing stock is fierce, especially in hot residential markets. For 20-something Millennials looking to buy their first home, the gap between wages and home values is making it difficult to enter the market. As home values rise, so do down payments. For people with no prior equity, coming up with the critical first payment can be difficult when house prices are rising twice as fast as their salaries.

Of course, it’s not just Millennials struggling with rising prices and near-stagnant wages. Household budgets are becoming increasingly strained by this new reality, even as the economy returns to “full employment.” This partly explains the recession-like qualities of the nation’s retail sector, which is shedding jobs at an unparalleled pace.[2] (Retail corporate earnings for the first quarter were described as a “train wreck” by industry analysts.[3])

However, it’s not all gloom-and-doom for Millennials and other young buyers. This demographic, which is viewed as a proxy for first-time buyers, has accounted for the large share of home purchases for four consecutive years, according to the National Association of Realtors (NAR).[4] Clearly, the labor market uptrend has benefited young people despite mixed signals about the quality of jobs being created in the economy.

With home values showing no sign of abating, industry analysts recommend setting expectations lower for your first home. This includes shopping around for a fixer-upper or going outside the desired neighborhood. This will also make it more likely to meet more stringent lending guidelines that have been described as “very black and white.”

New homes are increasingly out of the question for demographics struggling with down payments or facing challenges qualifying for mortgages. In 2015, the median price of a new home was about $300,000. To afford that, you’d have to make about $84,000 per year, which is nearly $30,000 higher than the national median income.[5]

[1] Marian McPherson (May 30, 2017). “S&P/Case-Shiller: Home prices hit 33-month high.” Inman.com.

[2] Tonya Garcia and Steve Goldstein (April 7, 2017). “The retail sector is shedding jobs like it’s a recession.” Market Watch.

[3] Paul R. La Monica (May 11, 2017). “Retail train wreck continues as sales plunge at Macy’s, Kohl’s.” CNN money.

[4] National Association of Realtors (March 7, 2017). Home Buyers and Seller Generational Trends.

[5] Ben Popken (June 5, 2017). “It’s Not Avocado Toast But Stagnant Wages Dimming American Dream.” NBC News.

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This article has been exclusively written for GoRion by...

Sam Bourgi

Sam Bourgi

Sam Bourgi has more than seven years of progressive experience in economic analysis, market research, public policy and the financial markets. He has a broad expertise in the financial markets, including commodities, real estate the foreign exchange. As a published author in both peer reviewed and industry research, Sam has covered topics ranging from mortgage-backed securities to consumer spending and labor. Sam's resume includes more than 40 government and industry publications, thousands of financial articles and hours of educational resources on personal finance and trading.

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