This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

How Stagnant Wages Have Trapped the Housing Market

NEW YORK (TheStreet) -- In the housing bubble of the past decade one warning sign flashed bright red: Home prices rose faster than incomes. That condition cannot continue for very long before too many prospective buyers can't afford to buy -- the point where the bubble bursts.

On a national basis, this isn't a major problem today, as mortgage rates are low and home prices remain below their bubble-era peaks. But in some markets, especially the large metropolitan areas of California, affordability is becoming an issue, according to Zillow.com, the online housing marketplace.

A survey commissioned by Zillow asked 106 economists why affordability was declining in certain markets. Stagnant income growth was cited as the No. 1 reason by 28% of those who responded, followed by abnormally high rates of home price appreciation at 27% and an abnormally low supply of homes for sale (21%). Other reasons were an insufficient number of homes (13%) and tight credit (11%).

"We're certainly in a better spot than we were just a couple years ago, but the housing market remains far from anyone's definition of 'normal,'" said Zillow Chief Economist Stan Humphries. He said that "despite a generally improving economy, incomes have not risen at the same level as home values and rents, leading people to spend an ever-larger share of their pay on housing. It will take years for these issues to either be adequately addressed through policy, or to naturally work themselves out of the market."

A shortage of homes in some of these markets hurts affordability by pushing prices up. The shortage is caused, in part, by a large number of homeowners who owe more than their homes are worth, despite rising prices in recent years. Those owners don't sell because they can't get enough to pay off their existing mortgage. Also, construction of new homes is weak, partly because it's difficult to build a home cheaply enough to compete with existing homes.

So it's a strange situation: Prices have risen enough to make buying too expensive for many prospective buyers, but prices are still too low to get more homes onto the market. It is stagnant wages that keeps the market trapped in this purgatory.

Nationally, homes remain relatively affordable by historical standards because prices are still below the peaks reached in the middle of the past decade. But incomes remain flat in most of the country. The big California markets demonstrate how hazardous this can be as the housing market struggles to return to normal. If incomes were to rise faster, buyers could afford larger down payments and bigger loans.

Currently, low mortgage rates help to make homes affordable in much of the country. But if rates rise, as many experts expect, buyers won't be able to borrow as much, making it harder for the average buyer to afford the average home. So if rates rise, returning to normal could take even longer.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,380.41 +263.17 1.63%
S&P 500 1,886.76 +24.00 1.29%
NASDAQ 4,258.4380 +41.0480 0.97%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs