The strange forces pulling residential real estate

Jobs and Wages

 Sometimes a boom does not lift all boats. Look at the current forces impacting residential housing. Unemployment is down to 4.1% and even U6, the measure of people on the sidelines and those that are not fully employed, stands at 8%. The wage increase year over year for private sector workers was 2.7% but only 2.4% for non-supervisory workers. The last time unemployment was this low was in 2000 when the wage growth was at 4.3%. So, what’s keeping the wages down? One major factor is that many people that have been on the sidelines during the Great Recession, are slowly making their way back to the workforce giving employers more flexibility without raising wages. The Wall Street Journal recently did a piece on Elkhart, Indiana that went from bust to boom on the back of RV manufacturing – an industry that relies on custom assembly and less robotics, thereby employing more people. While the town is experiencing an acute labor shortage, builders are not building and employed folks are tucking away more for a rainy day. Why? Because when you come out of a bust you are nervous about the next one. Many folks in this country feel that way. There is a certain post-recession anxiety that doesn’t allow them to open their purse strings fully. Many are content to rent rather than spend their precious savings on a mortgage.

 Affordability

 Combine the near stagnant wages and the post-recession trauma with the housing affordability issue and you have gale force headwinds towards homeownership. We have a historic lack of inventory and sky rocketing prices in many regions. Consider San Francisco where the average price of a home is around $1.6M. We don’t need to do the heavy math to know that only a small section of wage earners will afford homes. On the other hand, there is a lack of inventory in these expensive markets since many owners of higher priced homes are staying put in order to avoid a reduction in mortgage deductions. There are a large number of potential buyers on every deal with these deals getting done above asking price. This is somewhat ironical - those who can afford the more expensive homes are losing out to competition and the buyers of less expensive homes are squirreling away their savings for a rainy day. The tax cut has not impacted the middle class folks in a meaningful way while the stock market roller coaster serves as a stark reminder that happy days could evaporate anytime. What’s worse is that the common person on Main Street can longer understand the root cause of this market volatility and why their net worth fluctuates on a whim. Investment real estate offers much greater stability than the market, but comes with its risks as well. If you are buying what no one else is buying then either you are a genius or a fool. Unfortunately, most families with the usual commitments of putting kids through school should not wait to find out if they made the right bet when it is too late. Buying or investing in residential properties now, needs more skill than ever to come out ahead. If you live in a high priced area and want to own real estate but are being shut out, it may be time for you to look at other parts of the country where your dollar will go further and you will find stable renters who have no desire to own a home anytime soon. If we are in this situation in a booming economy, one can only envision the kind of caution a slowdown will bring to many people in the middle of the income curve.