The recovery in house prices is weakening again ten years after the great crisis. However, prices and mortgage rates are rising faster than incomes.
IIn the United States, despite high demand, homes are becoming increasingly unaffordable for first-time buyers. “Rising interest rates in combination with high house prices and shortage of inventory are pushing prospective buyers in the entry-level segment further out of the market,” said Lawrence Yun, chief economist of the American real estate association NAR. “Realtors report sustained demand – tenants want to become homeowners – but there just aren’t enough properties in their price range.”
In August, the number of existing home sales in the United States was flat for the first time in four consecutive months. As in July, according to the NAR, a total of 5.34 million houses changed hands. This corresponds to a decrease of 1.5 percent compared to the previous year. There were, however, regional differences. Increasing sales in the Northeast and Midwestern United States were offset by declining sales in the West and the South. The prices for private real estate – single-family homes, townhouses and condominiums – were a median of $ 264,800, 4.6 percent above the level of the previous year. So half of the properties sold were more expensive, the other half cheaper.
The stock of houses for sale had increased slightly year-on-year. According to NAR economist Yun, this is still far from a “healthy level”. “There are also too few new houses being built to meet demand,” said Yun. The majority of properties are sold quickly – within a month. “That is an indication that more supply, especially homes at moderate entry prices, would drive sales,” he said.
Rise in mortgage rates slows inflation
Housing trends play an important role in the American economy because homes have traditionally been the single most important element in American wealth creation. House prices influence the consumer behavior of homeowners, and the American economy is two-thirds dependent on private consumption. The American housing market was also at the center of the global financial crisis ten years ago. After a speculative upswing, falling house prices triggered a severe recession.
Real estate prices have been on the upswing since 2012 and have returned to the record level of 2006 in nominal terms. Taking inflation into account, however, prices have only fully recovered in a few metropolitan areas such as Dallas or Seattle.
The rise in mortgage rates is beginning to slow down inflation. In July of this year, house prices, measured by the S&P Corelogic Case-Shiller Home Price Index, rose 6 percent year-on-year. The growth rate was slightly below the value of the previous month, when the house price index had risen by 6.2 percent.
The problem for many prospective buyers is that prices and mortgage rates are rising faster than incomes. According to real estate financier Freddie Mac, the average interest rate for a typical 30-year mortgage was just under 4.6 percent in August. In August 2017, the interest rate was 3.9 percent. Assuming a down payment of 20 percent, or about $ 53,000, at the median price of $ 264,800, homebuyers have to calculate with a monthly mortgage rate that is almost $ 100 higher. The real estate association NAR, which also calculates an affordability index for real estate, estimates that home buyers recently spent 18 percent of their income on paying their mortgage payments. A year ago it was only 16.5 percent.
Real estate is of course becoming less affordable, especially in regions where prices have recently risen above average. According to the Case-Shiller Index, house prices in the Las Vegas metropolitan area had risen by almost 14 percent in July compared to the previous year. The prices in the metropolises of Seattle and San Francisco also climbed double-digit percentages. Prices rose 12.1 percent in Seattle and 10.8 percent in San Francisco. The rise in prices there is being driven to a large extent by the upswing in the technology sector. Seattle is the location of the large software company Microsoft and the online retailer Amazon. The headquarters of Apple, Alphabet (Google) and Facebook are located in the metropolitan area of San Francisco. In contrast to Seattle and San Francisco, house prices in Las Vegas have not yet returned to nominal pre-crisis levels. Las Vegas was one of the regions in which house prices fell particularly sharply after the speculative bubble burst. The region was something like the ground zero of the housing crisis and is now the place where the state of recovery and its ruptures become clear. In the suburb of North Las Vegas alone, of the 23,000 single-family homes since 2006, more than 7,500 – around a third – have been foreclosed.
The regional economy is growing, however, and new companies are settling here. Amazon has built two large distribution centers and is planning a third location. The cosmetics company Sephora has also laid the foundation stone for a new warehouse. With nearly 250,000 residents, North Las Vegas is considered one of the fastest growing cities in the country. However, many residents there cannot afford their own homes. Almost half of the single-family houses are rented. Ten years ago it was only a third. “It’s difficult for a lot of people to buy a house in Las Vegas,” 69-year-old retiree Alma Williams recently told a reporter for the New York Times. “People don’t make enough money.”