Key facts
- Home prices have reached an all-time high, but wage growth is outpacing price increases.
- Real home prices have declined in years where inflation is higher than price growth.
- Current home price growth is below inflation and wage growth rates.
- Housing inventory stands at 1.56 million units with 4.6 months of supply, considered a healthy level.
- Slower price growth, driven by wage increases and stable inventory, is positive for affordability.
Despite recent reports indicating record-high home prices, the U.S. housing market is showing signs of improving affordability. This is primarily attributed to wage growth consistently outpacing home price appreciation. Historically, home prices have shown resilience, with minimal declines since 1942, excluding the 2007-2011 period. However, years where price growth is lower than inflation and wage growth, such as the current period, contribute positively to long-term affordability.
For instance, if home prices rise by 1% while wages increase by 3.5% and inflation by 3%, this scenario aids affordability. The current market conditions, with price growth below inflation, indicate a softening in price increases. This trend is viewed as a positive sign for the housing market's health, moving away from the 'savagely unhealthy' state of previous years.
Housing inventory levels, while experiencing seasonal month-to-month declines, are not considered critically low. With 1.56 million active listings and 4.6 months of supply, the market is approaching normal levels (typically 2-2.5 million). This increased supply provides more choices for buyers and limits sellers' ability to dictate terms, further contributing to slower price growth and enhanced affordability.
In conclusion, the recent existing home sales report showed price growth at 1.8%, which, while slightly firmer than some forecasts, remains below the 3.5% wage growth. This sustained pattern of wage growth exceeding home price appreciation is a significant positive for the housing market, contrasting sharply with the unsustainable growth rates seen in 2020 and 2021.