Real Estate Has Become Unaffordable

Interview with Dr. Lawrence Yun, the chief economist of the National Association of Realtors.

"We are having a nationwide housing cost problem."

As I travel around the country, particularly in California, Seattle, Colorado and New York City, I hear the same story. "I want to buy a house, but the prices are so high! Every time I bid on something, I am competing with multiple bids and my offer is never taken."

Home prices are at record highs. According to the National Association of Realtors, the median sales price for single family homes rose to an all-time high of $236,400 in June of 2015 - above the previous record high of $230,400 set in July of 2006. It's definitely a Tale of Two Cities, however - Coastal and "Everything else." In San Jose, California, the median price is $980,000. Seattle, Manhattan, Washington DC and Honolulu are all above the median, with California coastal communities and Hawaii coming in at two to four times higher. Meanwhile Detroit is still in five digits, as are some cities in Illinois, Pennsylvania, Ohio and West Virginia.

The places that are affordable are the cities with the highest unemployment rates. And the cities where you can find a job, you might have to live in your car. Clearly something has got to give. For answers, I turned to Dr. Lawrence Yun, the chief economist of the National Association of Realtors. Click to access the full audio of my interview with Dr. Yun.


Natalie Pace:
The median existing home price is above the highs of June 2006. That was almost unthinkable during the Great Recession. What's happening?

Lawrence Yun: Job creation is helping. The generational low mortgage rates are adding enthusiasm for buyers. One interesting aspect of the current recovery is that we don't have supply. The home building activity is only half of the normal level. Therefore we have this housing shortage, which is boosting prices.

NP: What percentage of current sales is made up of foreclosures?

LY: Distressed property sales comprise 9% of the market. That is down significantly. It used to be 35% just a few years ago. Next year, you will see a non-eventful number.

NP: What about judicial foreclosure states? New Jersey is now the highest foreclosure state.

LY: I'm glad that you brought up New Jersey. Even though the shadow inventory nationwide has been cut in half, making up less than 10% of the sales, some states still have elevated levels of shadow. There is a large shadow overhang in New Jersey, New York, Connecticut, Illinois and Florida.

NP: At current prices, are you worried about affordability? I'm hearing people, particularly in the coastal regions, like San Francisco, Seattle and Los Angeles, saying they can't afford to buy. These are people with decent jobs who would love to be a homeowner.

LY: Prices are very expensive in some markets, like San Francisco, Honolulu, New York City, Washington, Boston and L.A. The typical home in San Francisco is $900,000. The income required to buy that home is $200,000 annual income. Only 10% of people in the San Francisco area are in that category. Denver and Seattle used to be considered affordable, but have now become unaffordable. They are not as high as in San Francisco, but it is approaching $400,000, half a million dollars, clearly record highs from the local market perspective. These rising prices are beginning to squeeze out some of the potential buyers. But at the same time, renters are also getting squeezed. Rents are rising at 4% nationwide, much higher in San Francisco and the Seattle markets, while incomes are only rising 2%. So one can say that we are having a nationwide housing cost problem. This is a consequence of underproduction by the home builders.

NP: With things spiraling so far out of the realm of reality, do you think that creating more supply will really fix the problem?

LY: Home prices are rising anywhere from 3-4 times as fast as people's income. Rents are double the income growth rate. This is unhealthy, unsustainable. The only way to tame the housing costs is to have more supply. So, maybe relaxing the regulations on small-size banks so they can lend to the homebuilders. We have a mismatch, a dramatic shortage, of owner-occupant homes that are available for sale.

NP: Let's talk about the international market. Is the international appetite for U.S. real estate part of the problem of pushing up real estate prices?

LY: The attractiveness of U.S. property for foreigners is that they know it is secure. There is no risk of confiscation. Also, America is a nation based on rule of law. That's why foreigners like to purchase real property here in the U.S. China is the biggest player. They replaced Canadians in the most recent data. We saw some drop from Latin America, due to the sluggish economy in Brazil and Argentina. The European market is unclear because the euro economy is growing at close to zero.

NP: Are there certain areas that are more desirable for the international market?

LY: The principal reason that they are buying is for a second home, a vacation home. So, they are looking for superstar cities, where they can go and enjoy the destination. In Miami, the condominiums are all foreigners. There are very few domestic purchasers. The Chinese prefer the Pacific coast, while the Canadians like the sun.

NP: Let's talk about the yuan. Can you give us a general sense about what it means to have market forces drive the value of the Chinese currency?

LY: For the Chinese currency, if you want to have international respect, you have to let it go and let the market forces determine it. The Chinese currency has weakened somewhat over the past few weeks, but one has to take a larger perspective. Going back ten years, one dollar could command 8 yuans. Today, one dollar commands six and change. So, over the 10-year time period, Chinese currency has strengthened against the U.S. dollar.

NP: All of the media reports are of the yuan "weakening" against the dollar... on purpose, to boost Chinese imports.

LY: The goal of the Chinese is that they want to make their currency as part of the international global reserve currency in the future. But to get there, they need to ensure that market forces determine the currency exchange rate, rather than the government constantly intervening.

NP: Some pundits are predicting that the yuan will be approved by an IMF vote in November.

LY: There are way too many if's and November is way too close. It's really about the confidence of the people. Do they trust their currency? Russia can say that they will make the ruble to be an international reserve currency, but no one would recognize that because no one wants to hold the ruble. It's not going to be November. It's not going to be next year. But over the next ten-year time horizon, there may be a chipping away at the dollar, with the yuan replacing it. Let's keep in mind that the British pound was, 100 years ago, the global reserve currency. It lost out to the U.S. dollar.

NP: Will the yuan's devaluation make U.S. real estate less attractive to the Chinese buyer?

LY: Even though China is going through a rough patch today, their GDP is expected to grow by 7%. That is much higher than the U.S. GDP growth. Whenever an economy grows at that level, it shifts the economy and produces a few millionaires. As the growth in the number of millionaires in China continues to expand, they like to have safe investments and they look to the U.S. as opportunities.

NP: What about the Millennial market. Are they purchasing homes?

LY: Last year, the first time buyer percentage was the lowest in 25 years. It's been a very difficult time for the Millennials. Maybe it's the sluggish economic recovery, slow wage growth, or the large student debt situation. The mortgage underwriting standards are also holding back some Millennials.

NP: Won't the challenges of affordability and student loan debt persist? Millennials are still living with their parents because their income is just not enough to go out and be on their own.

LY: In some markets, it will be impossible to buy. San Francisco is a very exciting place to be. But don't expect to buy a home for Millennials. It's just too expensive. Many middle parts of the country, like Des Moines and Grand Rapids now have a vibrant downtown, with Millennial walking communities and strong job creation. In these markets, homes are quite affordable. So those Millennials with jobs will be able to quickly convert into home purchase.

For more of Lawrence Yun's wisdom, visit Realtor.org, the website of the National Association of Realtors.

About Dr. Lawrence Yun
Dr. Yun directs research activity for the National Association of Realtors® and regularly provides commentary on real estate market trends for its 1 million REALTOR® members. USA Today in 2008 listed him among the top 10 economic forecasters in the country and he has been named among the 100 Most Influential Real Estate Leaders by INMAN News.