Are median incomes decoupling as a predictor of residential market hotness? Are longstanding measures of "affordability" in a market losing relevance?
In some places, it seems. In the first stretch of recovery, it's probably mattered more for new home demand that there is a population of people who have improving higher household incomes than that middle- and lower wages inched up.
This analysis from Susanne Trimbath, Ph.D., CEO and Chief Economist of STP Advisory Services, helps unmask some of the reasons for the geographical lumpiness in the housing recovery to date. It can explain why demand can be so strong in markets like the San Francisco Bay area, for instance, where prices are skyrocketing well beyond "affordability" benchmarks, and why demand is softening vs. fundamentals in other markets.
Relative affordability, or payment power emerge as more helpful ways to get a handle on a market or submarket's demand strength and hotness, than median incomes.
As Trimbath writes:
Where a population is less dependent on the traditional economy, higher home prices may be sustainable. This occurs in areas with a concentration of rich (“high-net-worth”) individuals. Some cities, like San Francisco and New York, are also attractive to rich home buyers from outside the US. About 5% of existing home sales in California were to buyers from China (mainland, Hong Kong and Taiwan), who spent about $12 billion on homes primarily in San Francisco, Los Angeles and San Diego.
So, where there's a widening gap between "fundamentals,"--the normal household income growth one would look for as employment and wages improve--and the more rarefied group of household wealth outliers, there's been demand for new homes.
Trimbath has this take on local market intelligence, which helps to explain more about why markets have continued to be hot despite a growing distance between median incomes and prices. Yet, some of these super hot markets may not be in a traditional "bubble."
One of Trimbath's points of focus is that rising interest rates would be a suppressor of momentum in the housing recovery. Here's here conclusion:
As long as the monthly payments on median-priced homes are out of reach for median-income households, demand in the middle-class housing market cannot strengthen. This is one more reason the Federal Reserve cannot afford to raise interest rates this year. That doesn’t mean that they won’t do; just that they shouldn’t – that don’t always do that smart thing.
Beyond that, even though we're seeing inklings that banks have begun to ever-so-slightly loosen their spigots to include more potential mortgage borrowers in their qualification standards, what's still at risk in the current recovery is the broad perception that homeownership is an attainable goal.
Economic well-being, and all its trappings including owning a home in even the most expensive markets, is alive and well for a few. But attainability, the capacity for the economy to hold out reasonable hope for more people to join that track of success, still seems to be shrinking.
In votes, local, regional, and national, and in affirmation or opposition to policies among regulators, American society faces a single choice that shoots to the core of the business of home building and development. It is this.
Do we want the American Dream?
If we do, then "attainability," which would give deserving, hard-working, financially responsible people a path of economic mobility, needs to play a greater part in a housing come-back. So far, it's provided those with wherewithal greater housing value for less.
Payment power is still the all-important governor to a wider housing recovery, and an underpinning to the American Dream. For a home builder, the role is critical, which is primarily to inspire people to aspire to economic mobility.