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Home prices’ drastic increase compared to income

What agents need to know about home prices’ drastic increase compared to income.

It’s no secret that the housing market has been on a roller coaster ride since 2008, with grossly inflated prices leading to a crash (and followed by a slow recovery). These days, we are experiencing another type of ride as home prices continue to soar well above incomes. Here’s what you need to know to help your clients ride it out.

The research on home prices and income

Our most recent research looked into the state of home prices and income and uncovered some challenging statistics.

Inflation is having an unequal affect

Inflation is a fact of life in the US economy, but it is affecting the housing market and personal incomes unequally. Since 1965, home prices have increased by 118%, but incomes have only risen by 15%. 

And the rate of this increase is unequal as well. Home prices have increased almost eight times faster than income during this period (and just over three times as fast since 2008).

People can’t afford as much house

In 2021, the average income necessary to own a modest home is $144,192. The average  median household income?  Just $69,178.

This takes into account that today the average house-price-to-income ratio is 5.4. With experts recommending that ratio be at or below 2.6, many potential homeowners are priced out before they even begin.

Cities are getting less affordable

The cost of living in a city has always been high, but our findings show massive increases in just how high.

Almost every city in the US has been affected by the 14.9% increase in house-price-to-income ratio. Nearly 90% of them exceed the recommended maximum, with just six of the 50 largest cities equal to or lower than 2.6:

  • Pittsburgh, PA (2.2)
  • Cleveland, OH (2.4)
  • Oklahoma City, OK (2.5)
  • St. Louis. MO (2.5)
  • Birmingham, AL (2.5)
  • Cincinnati, OH (2.6)

California had the lion’s share least affordable housing in metro areas:

  • Los Angeles (9.8)
  • San Jose (9.1)
  • San Francisco (8.3)
  • San Diego (7.8)

But these increases are not confined to urban areas. With the Consumer Price Index rising and the COVID-era popularity of open spaces and small towns, even suburban and rural areas are seeing a dramatic increase in home prices relative to smaller increases in income. This, combined with a 44% drop in housing stock in rural areas, means prices will continue to rise, even outside of cities.

Current homeowner equity is increasing

But now the good news. For homeowners looking to stay in their current home, equity is increasing as prices rise. And from 2015 to 2020, the most populated areas of the country saw the percentage of underwater mortgages decrease by 54%.

This might translate into a slowdown in sales and homeowners enjoy the fruits of rising home prices (and despair of finding a new house they can still afford).

What this means for real estate agents

There is an old Chinese curse: may you live in interesting times. These times are definitely interesting, and here’s how they will affect real estate agents moving forward.

What goes up…

After the world pressed “pause” in 2020 and the housing market stalled, homebuyers roared back to life in the spring of 2021. This rush to relocate meant that housing prices soared and stock fell while incomes and the economy was still in the infant stages of its recovery.

As with all rapid rises, there is the possibility for a dramatic fall. This is not inevitable, as increases in employment continue to support more homebuyers as they look to move. But it’s important to consider that because incomes are not keeping pace with home prices and the rise in mortgage rates, the housing market could see a correction in the not-too-distant future.

Fortunately, because mortgage regulations have tightened, this is not actually a bubble that will burst. While a correction involving higher interest rates might limit some borrowers, it also protects the market from a full meltdown. This is good news for real estate agents in terms of their likely commissions in the future as well as their ability to get the best house for their clients.

There are fewer homes on the low end

First-time and younger buyers will see fewer lower-priced homes — and intense competition to get them. This is because the rising tide of prices is lifting all boats in terms of asking price. Coupled with rising prices on consumer goods and fairly stagnant incomes, this means that many prospective homeowners are priced out.

And even in areas where new construction is typically more affordable, supply shortages and supply chain disruptions have added an average of $26,000 to the cost of a new home. This puts homeownership out of reach for many buyers.

Competition is fierce

These days, there are approximately twice as many real estate agents selling between 20 and 30% fewer homes. This means that bidding wars are common and homes are selling within days of listing.

Real estate agents who are able to pivot and develop connections within their community will be most able to get the best house (or secure the best sale price) for their clients.

Technology is crucial

Now more than ever real estate agents need to know how to use technology to their advantage. This might mean adding personalized apps that can support not only viewing homes but also the secure financial transactions that go with buying and selling.

With homeowners unwilling to open their doors to potential buyers during the pandemic, many turned to technology for virtual open houses and document signing. With virtual reality tools and plenty of 3D walk-throughs and 360-degree photos, technological savvy is a critical tool for this unusual market.

The future of home prices and real estate agents

There is no doubt that real estate agents are navigating choppy waters as the US moves through the pandemic era. It takes a deft, sure hand on the rudder to steer clients to their new home or to negotiate the best price for a seller. And while inflation has a long way to go to catch up to surging home prices, there are signs that the two might just start to meet in the middle.

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