"Home prices in many housing markets across the country found a floor in 2012 and since then have rapidly appreciated, particularly in markets attracting institutional investors, international buyers or some other flavor of cash buyer not constrained by income as much as traditional buyers," said Daren Blomquist, vice president at RealtyTrac. "Eventually, however, those traditional buyers will need to play a bigger role in the housing market for the recovery to maintain its momentum.
"Those markets with the biggest disconnect between price growth and wage growth during the last two years are most likely to see plateauing home prices in 2015 until wages catch up," Blomquist continued. "Meanwhile, markets where wage growth has outpaced home price appreciation during the last two years are poised to see at least steady growth in home prices in 2015 in most cases."
Among the 184 metro areas analyzed, the average wage growth over the two years ending Q2 2014 was 3.7 percent while the average home price appreciation in the two years ending in December 2014 was 13.4 percent.
Despite the rapid increase in home prices, most markets are still affordable by traditional standards. Of the total 184 markets analyzed, 135 (73 percent) with a combined population of 143 million had a median home sales price in December that required less than 28 percent of median income for monthly mortgage payments, including property taxes and insurance.
"South Florida is still an affordable market and a bargain when compared to other major cities. Low interest rates and prices moderating at historical single-digit levels bodes well for all as our economy is diversifying and gaining momentum," said Mike Pappas, CEO and president of the Keyes Company, covering the South Florida market, where home price appreciation outpaced wage growth by a ratio of 7:1 during the housing recovery but where mortgage payments on a median-priced home represent 27 percent of the median household income. "Construction and hospitality are booming but we are also seeing strong gains in the financial, tech, and health industries."
Home price appreciation outpaces wage growth in 76 percent of markets
Home price appreciation outpaced wage growth in 140 of the 184 metro areas (76 percent) with a combined population of 176 million. Metropolitan statistical areas with the highest ratio of price appreciation to wage growth included Merced, California (141:1), Memphis, Tennessee (99:1), Santa Cruz, California (94:1), Augusta, Georgia (78:1), and Palm Bay-Melbourne-Titusville, Florida (62:1).
Other metro areas where home price appreciation has outpaced wage growth by a wide margin during the housing recovery included Sacramento, California (17:1 ratio), Riverside-San Bernardino, California (15:1 ratio), Las Vegas, Nevada (14:1 ratio), and Detroit (12:1 ratio).
"As wage growth remains fairly flat across the Ohio markets, the effects of low available inventory continue to escalate prices, creating a negative effect on home affordability for many first time, and move up home buyers," said Michael Mahon, executive vice president at HER Realtors, covering the Ohio markets of Cincinnati, Dayton and Columbus, the latter of which has seen home price appreciation outpace wage growth by a ratio of 9:1 during the housing recovery. "While the time to purchase is now, for home buyers to take advantage of all time low interest rates, continued stress on home affordability and credit repair shall leave many missing this prime time opportunity of home ownership."
Among the 140 markets where home price appreciation has outpaced wage growth during the housing recovery, 45 metro areas (32 percent) with a combined population of 63 million had a median home price in December that required more than 28 percent of the median income for monthly mortgage payments -- unaffordable by traditional standards.
These 45 traditionally unaffordable markets with price appreciation outpacing wage growth included Los Angeles, San Francisco, San Jose and San Diego in California, Seattle, Portland, Boston and Denver.
"The good news in Seattle is that we have higher than average income growth. The bad news in Seattle is that homes are becoming increasingly less affordable, especially in the core areas near the city," said OB Jacobi, president of Windermere Real Estate, covering the Seattle market. "While wages in Seattle are expected to continue rising at a healthy pace, so too are housing prices. And as long as buyer demand outpaces seller supply, it is unlikely that we will see any improvement in affordability in the foreseeable future."
"Marketing homes in areas that have home ownership costs continually outpacing wage growth means that you run into more people leaving areas for their next move, up or down," said Mark Hughes, chief operating officer at First Team Real Estate, covering the Southern California market. "The dynamics driving the affordability, or lack of affordability, have as much to do with the new global nature of real estate as much as they have to do with the speed of local wage acceleration. Southern California will remain increasingly unaffordable from within, but a hot commodity world-wide."
Wage growth outpaces home price appreciation in 24 percent of markets
Wage growth outpaced home price appreciation in 44 of the 184 metro areas (24 percent) analyzed with a combined population of 51 million. Metropolitan statistical areas with the lowest ratio of home price appreciation to wage growth were Hagerstown-Martinsburg, Maryland-West Virginia, Wichita, Kansas, Des Moines, Iowa, Gulfport-Biloxi, Mississippi, and Harrisburg, Pennsylvania.
Other metro areas where wage growth outpaced home price appreciation during the housing recovery included New York-Northern New Jersey-Long Island, New Haven, Connecticut, Virginia Beach, Tulsa, Oklahoma, and Raleigh, North Carolina.
Top 25 metros with highest rate of home price appreciation
Metropolitan statistical areas with the highest rate of home price appreciation during the two years ending in December were Detroit (up 57 percent), Salinas, California (up 49 percent), Myrtle Beach, South Carolina (up 47 percent), Houma-Bayou Cane-Thibodaux, Louisiana (up 45 percent), and Modesto, California (up 44 percent).
Other metro areas among the top 25 for highest rate of home price appreciation in the two years ending in December 2014 included San Francisco, California (up 39 percent), Atlanta (up 38 percent), Houston (up 37 percent), Sacramento, California (up 37 percent), San Jose, California (up 33 percent), and Memphis (up 33 percent).
Top 25 metros with highest rate of wage growth
Metropolitan statistical areas with the highest rate of wage growth in the two years ending in the second quarter of 2014 were Gulfport-Biloxi, Mississippi (up 13.2 percent), Naples-Marco Island, Florida (up 9.2 percent), Houma-Bayou Cane-Thibodaux, Louisiana (8.9 percent), Manchester, New Hampshire (8.4 percent), and San Jose, California (8.3 percent).
Other metro areas among the top 25 for the highest rate of home price appreciation in the two years ending in December 2014 included Madison, Wisconsin (up 8.1 percent), San Francisco (up 7.1 percent), Tulsa, Oklahoma (up 7.0 percent), Provo, Utah (up 7.0 percent), and Albany, New York (up 6.4 percent).
Report methodology
Using Bureau of Labor Statistics average weekly wage data, RealtyTrac looked at average weekly wages in the second quarter of 2012 (the most recent data available at the time of the analysis) compared to the second quarter of 2014. Data on national wages is from the Bureau of Labor Statistics and is based upon median wages while MSA level data is based upon average wages.
For home prices RealtyTrac looked at the median home sales prices derived from sales deed data in December 2014 compared to December 2012 based on the hypothesis that a change in average wages would take at least six months to impact home prices. For non-disclosure states list median home prices were used instead of sales deed data. In calculating average house payments, fixed mortgage rates were obtained from Freddie Mac in June of every year. It was assumed that the average borrower would make a 10 percent down payment on a property that sold for the median home price, the mortgage term would be 30 years, and insurance combined with property tax would be 1.39 percent of the value of the home.
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About RealtyTrac
RealtyTrac is a leading supplier of U.S. real estate data, with nationwide parcel-level records for more than 130 million U.S. parcels that include property characteristics, tax assessor data, sales and mortgage deed records, default, foreclosure, auction, and Automated Valuation Models (AVMs) along with more than 45 key local and neighborhood dynamics for residential properties nationwide via its subsidiary, Homefacts.com. RealtyTrac's housing data is relied on by the Federal Reserve, U.S. Treasury Department, HUD, numerous state housing and banking departments, investment funds as well as millions of real estate professionals and consumers, to help evaluate housing trends and make informed decisions about real estate.
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