Real Estate Values Outstrip Buyers’ Wallets
Recent analysis of the US real estate market concluded that
during the past 5 years residential property alone has increased in value by almost 50%.
While it is good for homeowners who can quickly increase equity, it presents problems for buyers whose salary increases don’t keep up. There are instances where growing families, needing to “buy up” to a larger home. They sell homes which have substantially appreciated during their ownership, only to find the net profit isn’t enough for them to afford a larger home, because of the quick jumps in property values in their area.
Housing prices across America have been rising steadily for the last several years and, in many locations, they’ve increased exponentially. The average price of a home in the US is $268,000, up from June of 2004’s $209,000, an increase of 23%. This overall average is small compared to market areas where housing prices have increased over 75-100% in less than a year.
At the same time, median income levels have only increased 3 to 4% for most families of 4 according to census reports. The median income for a family of four in 2004 was $65,093 which would make the average today around $67,500 annually.
When you add to that higher fuel costs, which increase costs of goods and services across-the-board, you find higher housing prices can quickly outstrip the buyer’s ability to purchase. Additionally, housing shortages have created a seller’s market for builders who, given the choice of building a $150,000 starter home and a $450,000 upgraded home on the same piece of property, will build the more expensive home because they make more money for relatively the same costs.
In my own metropolitan area, I have dozens of clients that are qualified for homes in the $125,000 to $225,000 price range. Yet with the area’s property shortages, there are precious few available and no new construction of consequence. If there is potential for a real estate “bubble” to burst, I believe it will be driven by the fact that there are fewer and fewer buyers who are able to purchase at the increasingly higher prices sellers are putting on properties.
To achieve balance in any area, you have to avoid extremes on either side of the scale. With low interest rates and flexible loan programs, more people are able to purchase homes than ever before. However, unemployment rates and/or salary levels won’t continue to support exponential increases in housing prices.
Next: Is the real estate boom missing some markets?