Home prices are a problem. A big problem.
The Action Alerts Plus team considered it recently following a National Association of Realtors report: “’Rising inventory and moderating price conditions are bringing buyers back to the market. Affordability, however, remains challenging as home price gains are roughly three times wage growth,’ said NAR Chief Economist Lawrence Yun.
‘The more moderately priced regions of the South and Midwest are experiencing stronger signing of contracts to buy, which is not surprising. This can be attributed to some employees who have the flexibility to work from anywhere, as they choose to reside in more affordable places.’”
Inflation ultimately has two aspects: The first occurs when prices rise. Yet rising prices alone don’t create a problem, and consumers usually don’t experience higher prices alone as inflation.
It’s the second aspect of inflation which can create very real problems in an economy. This occurs when prices rise faster than incomes. In this case, consumers lose purchasing power and see their quality of life erode as jobs buy less and less over time.
That’s exactly what has happened to the housing market the AAP team noted. Over the past decade housing prices have skyrocketed, with costs vastly outpacing any gains of income. This has locked more and more would-be homeowners out of the market, most particularly millennials, young families and first time buyers. Those who can find a home have to dedicate larger segments of their income to debt, signing decades-long commitments that will siphon away purchasing power that would have been spent elsewhere in the economy.
Along with higher education it is perhaps the clearest example of an inflationary cycle in recent economic history.
Home sales remain high, in August hitting 119.5 percent of the rate of sales in 2001. As a result this cycle is unlikely to break in the near future.