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Are home prices the latest evidence housing is stalling, or bubbling?

It gets better? No, it gets worse – just like job growth and wage stagnation

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The housing industry is not happy about recent housing data, including Tuesday’s home-price releases, and it looks like it’s going to get worse before it gets better.

The Federal Housing Finance Agency’s home price index released Tuesday morning shows that U.S. house prices rose just 0.8% in the second quarter of 2014.

This is the twelfth consecutive quarterly price increase in the HPI, but a significant slowdown from the June S&P/Case-Shiller Home Price Indices also released Tuesday morning. (Unlike Case-Shiller, the FHFA HPI is calculated using only home sales price information from conforming mortgages sold to, or guaranteed by, Fannie Mae and Freddie Mac.)

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Sterne Agee chief economist Lindsey Piegza put it in perspective thusly.

“Price gains appear to be slowing as both home supply increases and nominal ticket prices retreat against a backdrop of minimal wage pressure. As we have written extensively, consumers are slowly losing their ability to finance large purchases such as homes as price appreciation continues to outpace wages,” she said. “Keeping all else constant, in order to continue to boost demand, either lending standards would need to be loosened (we know how that story plays out) or prices need to slow further.”

Job and wage stagnation – sounds familiar, no?

Tom Showalter at Digital Risk has been in front of these declining numbers for a while, noting that without a pickup in the health of the overall economy, the housing market won't continue to see the same level of price appreciation. 

“New jobs pay less. One of the major problems with the “recovery” is that newly created jobs are paying far less than the jobs they replaced (i.e. were lost during the recession),” Showalter said. “In 2014, new jobs paid $47,171, which was 23% lower than the $61,637 average wage of jobs that disappeared during the Great Recession.” 

He also noted that income gains are skewed. Without sounding like a Berkley professor of grievance studies, the truth is that lately the rich have been getting richer while the middle class got poorer.

“The wealthiest top 5% of households saw their share of total incomes increase from 16.5% of total incomes (1975) to 22.3% of the total (2014),” Showalter said. “From 2005 to 2012, the highest 20% of the households captured 60.6% of the income gains; the wealthiest benefited the most with the top 5% accumulating 27.6% of gains. In terms of median income, in 2014, median income ($51,017) stood at its lowest levels since 1995.” 

There is also the issue of declining affordability resulting from this wage stagnation.

“With median income still in decline, housing prices in a slight increase and interest rates poised to increase, overall home affordability will most likely decline; this will impact housing and mortgage markets in 2015,” he said. 

Quicken Loans Vice President Bill Banfield was a little more optimistic, but still realistic. 

“The gains in home prices are starting to slow but remain directionally positive. Other housing data on starts and existing home sales are upbeat and should underpin stability on the housing front,” Banfield said. “Look for prices to remain flat or even decrease a bit in the coming months, as inventory continues to catch up with demand and interest rates could rise from the cozy levels we’ve seen this year.”

Anthony Sanders, distinguished professor of real estate finance at George Mason University, meanwhile, has been pounding the drum about wage and income stagnation and its effect on housing for the longest time, like a modern-day Cassandra.

“It is a shame that home price growth is 8.10% while average wage growth is only a dismal 2%,” Sanders said. “It is a fun time for wealthy investors (domestic and foreign) who can purchase homes with all-cash.”

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Wolf Richter, who is definitely not one to sugarcoat things, says this is just another aspect of what he calls “Housing Bubble 2.”

“So now there’s another aspect of Housing Bubble 2, this time in new single-family homes: dropping sales, swooning prices, and ballooning inventories. Sales of new single-family homes fell 2.4% in July, to a seasonally adjusted annual rate of 412,000, the worst in four months, and those four months had been nothing to brag about,” Richter says. “While up 12.6% from a year ago, sales have been languishing, as the chart below shows, near the bottom of the range. By comparison, during the housing construction bubble, new single-family homes were selling at a seasonally adjusted annual rate of well over 1,000,000. The inveterate optimists that economists have become were disappointed.

“They’d expected a rate of 430,000 sales. The median price dropped 3.9% from June and almost 6% from May, to $269,000, and was up only 2.9% from a year ago. But hey, at least year over year, it wasn’t a downdraft…not yet,” he said. “(O)ver the longer term, and after revisions, one trend is now becoming glaring: the supply of new homes on the market (green line, right scale) rose to 6 months, from 5.6 months in June. It was the highest – and for builders the worst – level since October 2011.”

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