Affordability Just One Factor Slowing Housing

Sharga: “The big problem continues to be wage growth—or the lack thereof. Home-price appreciation has outpaced wage growth for years now.”

IRVINE, CA—In addition to reduced affordability , tight credit and limited inventory are also main headwinds facing the housing market, which will likely not see dramatic growth in sales volume during 2016, Ten-X ‘s newly appointed chief marketing officer Rick Sharga tells GlobeSt.com. Following the release of the firm’s latest Residential Real Estate Nowcast in early January, which projected that existing home sales for the month of December will fall between seasonally adjusted annual rates of 4.8 million and 5.11 million annual sales, with a targeted number of 4.95 million—up 4.1% from a surprisingly lackluster November—we spoke exclusively with Sharga about affordability and other factors that may affect home sales in 2016. GlobeSt.com: How much do you anticipate reduced affordability due to increasing home prices to impact home sales this year? Sharga: First, let’s keep in mind that in most markets, home prices still fall within what’s historically been considered the “affordable” range, but as prices continue to rise, and with the probability that interest rates are likely to begin to creep up sometime in 2016, it’s very possible we’ll begin to cross the threshold. Some of the hotter markets have already moved into less affordable territory. For instance, in Orange County, CA, where our corporate offices are located, the California Association of Realtors® estimates that only about 20% of adults can afford to buy a home, and sales volume slowed down measurably in the second half of 2015. From a national standpoint, it’s less likely that we’ll see the volume of existing-home sales drop significantly, except in a few markets that have been overheated for the last couple of years. It’s more likely that affordability will pick up steam as one of the things preventing the housing market from fully recovering. We’ll likely see year-end sales numbers somewhere around 5.3 million units in 2015; I don’t expect to see dramatic growth from there in 2016, even though a “full recovery” would probably have us slightly above 6 million units sold. Affordability will join tight credit and limited inventory as the main headwinds facing the housing market. GlobeSt.com: Is there anything the real estate industry can do to improve affordability and boost sales? Sharga: The short answer is that if home builders would simply start building more homes, particularly more affordable homes, it would almost immediately help improve affordability. One of the root causes of affordability issues is the lack of available inventory for sale. Existing home sales are still bogged down in part due to a high percentage of homeowners who are in negative or near-negative equity positions. That problem will clear up over time (ironically, as home prices continue to rise), but in the near-term, the lack of homes for sale creates a seller’s market, where buyers are often bidding against each other for the limited stock, which can inflate prices. New home inventory, which has improved slightly over the past year, is still near its 40-year low, and there’s virtually nothing available for entry-level buyers. December housing-start numbers weren’t very encouraging, either, as they were down from November, and still far off what we’d need to see to bring supply closer to the potential demand. GlobeSt.com: Will reduced affordability cause more people to turn to the multifamily market for housing? Sharga: That’s a really good question. Normally, the answer would be yes. But there’s a similar situation in the multifamily space today: household formation has begun to accelerate after lagging behind expectations for a few years, and a higher percentage of those households have been renting. Even with the inventory that’s been brought to market in recent years, demand continues to outpace supply. That’s led to historically low vacancy rates among virtually every category of rental property and driven rental rates to historically high levels in many markets across the country. Those high rental rates contribute to the problem in another way: they make it difficult for renters to save enough money for a down payment on a house. So for many young adults, or families at the low end of the economic spectrum, it’s hard to find affordable housing of any kind. GlobeSt.com: What else should our readers know about affordability and home sales? Sharga: There’s been a lot of focus on home-price appreciation when it comes to home affordability, but that’s only one leg of the stool. Mortgage rates , which are still near the lowest they’ve ever been, is another leg, and even if rates do go up in 2016, they probably won’t go up much beyond about 4.2% for a 30-year fixed rate loan. The big problem continues to be wage growth—or the lack thereof. Home-price appreciation has outpaced wage growth for years now. Middle class wages are lower than they were six or seven years ago. And most economists predict modest wage growth at best, while home prices are projected to go up by another 3% to 4% in 2016. One other aspect to keep in mind: we’re still recovering from the most volatile boom and bust cycle in the history of the US housing market; many potential buyers simply aren’t willing to extend themselves financially as much as prior generations of homebuyers did, simply because they don’t want to become the next wave of foreclosure statistics. So, even if homes may be “affordable,” those potential buyers may not be ready to take on the risk until they’re more financially secure.