Bad Combination: Rising Housing Prices + Stagnant Wages

A little over a week ago, Taylor White penned an article for MarketWatch that alarmed me, This is why Americans are losing confidence in the housing market. Basically a combination of rising house prices, salary stagnation, generational trends and higher interest rates have hurt consumer confidence in the housing market. Today Ben Casselman narrowed in one one factor: rising prices outpacing wages.

With unemployment below 3% and construction everywhere, Denver is booming. "Yet," wrote Casselman, "Denver’s once-soaring housing market has run into turbulence. Sales and construction activity have slowed in recent months. Houses that would once have drawn a frenzy of offers are sitting on the market for days or weeks. Selling prices are rising more slowly, and asking prices are being slashed to attract buyers. Similar slowdowns have hit New York, Seattle and even San Francisco, cities that until recently ranked among the nation’s hottest housing markets. The specifics vary, but economists, real estate agents and home builders say the core issue is the same: Home buyers are reaching a breaking point after years of breakneck price increases that far exceeded income gains." The problem is clear: wages are not keeping pace with increased prices and would-be buyers are being pushed out of the market.

Nationwide, sales of previously owned homes fell 1.5 percent in August from a year earlier, according to the National Association of Realtors. Residential building permits were down 5.5 percent over the past year, according to the Department of Commerce. Many economists say the housing market may have turned into a drag on the gross domestic product.

...Introductory economics textbooks suggest that high prices should attract more supply or suppress demand-- or both. Inventories of unsold homes have risen in Denver and other markets in recent months, and the real estate site Zillow found that price cuts have become more common.

Over all, however, the housing market is not behaving as the textbooks say it should. Inventories remain low despite the recent increases, and new construction is slowing, not picking up.

Part of the problem, local real estate agents say, is that the furious pace of price growth has essentially gummed up the market, making homeowners reluctant to sell for fear of being unable to find a new home.

Rising interest rates are compounding the problem because would-be sellers do not want to give up their low interest rates, a phenomenon economists call the lock-in effect.

...Ultimately, the key to breaking the logjam is to build more homes. Downtown Denver is crawling with cranes, many of them erecting amenity-filled apartment complexes aimed at young professionals. A drive in almost any direction from downtown reveals freshly built subdivisions with names like Tallgrass, The Enclave and Green Gables Reserve.

Most of those new homes, however, will list for more than $400,000. And hardly any builders are selling properties for under $300,000 without government subsidies. Even many home builders worry they are pricing themselves out of the market.

“I see the biggest threat to our business as the affordability challenge, that we are building houses that people can’t afford,” said Gene Myers, chief executive of Thrive Home Builders.

The problem, Mr. Myers and other local builders say, is cost. The price of land, building permits and other fees can run close to $150,000 for a single-family lot-- before construction.

Some of the challenges are specific to Colorado. Quirks in state law, for example, make it easy for condominium buyers to collectively sue builders over construction defects, making developers reluctant to build condos.

But other issues are common to many cities. Building materials have become more expensive, in part because of tariffs on lumber and other products that President Trump imposed this year. Labor costs are rising, too, especially for skilled trade workers. Restrictive zoning makes it hard to build denser developments that make cheaper homes profitable for builders.

“They’re producing what they can produce,” said Sam Khater, chief economist for Freddie Mac, the government housing-finance company. “The problem is, it’s uneconomic for them to produce affordable.”

This big-city conundrum is spreading. People priced out of San Francisco moved to Seattle and Portland, driving up prices and displacing people who moved to Denver and Austin. Next on the list: Boise, Nashville and other cities offering some of the same attractions at lower prices.

Sure enough, the online real estate site Redfin this spring found that Denver had joined Seattle and San Francisco as cities with a “net outflow” of users-- that is, there were more people on the site looking to leave Denver than to move there.

“City after city is going to face this,” said Glenn Kelman, Redfin’s chief executive. “At some point, the buyers step back and say, ‘Enough is enough.’”

More people are moving to Denver than leaving it, but migration has tapered off in recent years. J. J. Ament, chief executive of Metro Denver Economic Development Corporation, said he had seen no sign that rising home prices were making the region less attractive. Last month, VF Corporation, an apparel maker that owns brands like The North Face and Vans, announced it would move its headquarters to Denver from North Carolina, partly because of the area’s reputation for outdoor activities. The state also offered $27 million in incentives.

“I wouldn’t use the word ‘crisis,’” Mr. Ament said. “The work force is still willing to move here.”

Plenty of people in Denver do use the word “crisis,” however. A January report from Shift Research Lab, a local research group, concluded that years of under-building have left the region with a shortfall of tens of thousands of housing units.

That shortfall could threaten Denver’s growth, said Phyllis Resnick, a Colorado State University economist and one of the report’s authors. The skilled workers moving to the area, who have been so important to attracting companies and jobs, want to be able to eat out at restaurants, drop off their dry cleaning and send their children to school, all of which require lower and middle income workers. If they cannot afford to live in the area, Ms. Resnick said, Denver will not retain its allure-- and the economy will not keep growing.

“My concern is, at some point it sort of breaks because we can’t house the folks that we need to fill out all the economic activity in the region,” she said. “I’m not convinced that in the near term it will correct itself just through market forces, unless that’s through people moving out.”

Unmentioned is that in some of the most desirable markets-- particularly New York, San Francisco/San Jose, Los Angeles/Orange County, Seattle, San Diego, the DC area... huge amounts of money from Asia and Russia have flooded into housing as a safe investment or a place to launder and park shady money. [Trump's entire business model was based on this.] Condos and houses in all these markets sit unoccupied while housing prices rise so high that American workers can't buy them. Back in June, the Wall Street Journal reported the western cities want to slow the flood of home buying by Chinese nationals-- but can't. The flood of capital "washing over cities" is distorting home prices and irritating locals who are squeezed out of the market.