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2 things that could torpedo home price gains

(Hint: It has to do with work and wages)

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Home prices are gradually climbing nationwide, though there are strong headwinds that could kill any momentum coming from persistent labor market struggles and depressed median wages.

That’s the conclusion from the latest sustainable home price update from Fitch Ratings.

Home price growth in the western United States continues its near-record pace among a limited supply owing to the fact that new home sales are limited by low construction rates.

Existing inventory is also restricted by underwater borrowers unable to sell, and a surprising number of homes still mired in extended foreclosure proceedings.

"In markets with short supply, increased demand from institutional investors and individual borrowers returning to recovering markets has created the conditions for the sharp climb in prices," said Stefan Hilts, a director at Fitch.

As Housingwire has reported, unemployment appears to be down but a close look shows it’s not because jobs are being created but rather because people are dropping out of the workforce.

"Without a strong employment base, it is difficult to find sustainable support for the rapid growth in home prices across much of the country," said Hilts.

GDP growth is another area where strong numbers may be disguising economic weakness. Last quarter’s annualized growth rate of 4.2% marked the strongest numbers in nearly a decade.

However, median wages remain depressed as the economic base has declined in many traditional employment sectors, with 4Q’13 median household income 8% lower than in 1999 in real terms.

"With median wage levels stagnant, many potential buyers do not have the resources necessary to participate in the home ownership market," Hilts said.

For the full report, click here for the U.S. RMBS Sustainable Home Price and Economic Risk Factor Report – January 2014.

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