It’s been a long climb but real estate prices nationwide should soon top the levels last seen in 2007, the year when home prices hit their peak.
It looks like we’re on a roll but quick-and-neat comparisons between home prices now and home prices back then mask a number of problems.
It now takes $1.14 to buy what a dollar could purchase in 2007, so home prices have a long way to go before values are truly equivalent.
Even if we ignore inflation home values are not rising everywhere. According to the National Association of Realtors, in the third quarter home values rose in 125 metro areas but 47 areas saw actual price declines.
While housing has shown signs of recovery a lot of people are being left behind. Not only are houses too expensive to buy, for many they are also too expensive to rent.
You can see this issue most clearly in California, home to more than half of the nation’s gold-plated, high-cost markets. According to the Los Angeles Times, federal data shows that “California’s high cost of living has pushed hundreds of thousands of low-and middle-income workers to other states.”
These are the nation’s “recession refugees,” people moving to find more affordability, space and opportunities.
“In many cities,” said CNN, “demand is so great that there are easily enough high-income renters to support prices well out of reach for the middle class, not to mention lower-wage employees and seniors. And we can expect the imbalance between supply and demand to keep rents high for well beyond the short term.”
In December, RealtyTrac pointed out that around the country it’s typically cheaper to own than to rent in terms of monthly housing costs. However, this is not the case in the 25 counties with the biggest increase in millennials: In those popular areas rents represent 30 percent of monthly income while buying requires 36 percent.
“I call the decreasing affordability of housing the silent crisis because it eats away at the well-being of families and, by extension, society as a whole, with little notice from policymakers or the press,” housing expert Andre F. Shashaty told the National Real Estate Investor. “It got worse during the recession, as stagnation of incomes proved a bigger factor than a short-term hiatus in the long-term pattern of rising rents. There’s been some improvement as the economy has recovered, but the problem is still serious.”
Increasingly, the situation is very plain: People simply cannot afford to live in desirable but high-cost metro areas. This might seem like a problem for the poor and the middle class alone but guess what: If you’re rich you very much need those in the middle class to teach your children, put out your fires, drive your ambulances and fix your plumbing.
Richard Florida, with the University of Toronto, argues in The New York Times, that “red state economies based on energy extraction, agriculture and suburban sprawl may have lower wages, higher poverty rates and lower levels of education on average than those of blue states, but their residents also benefit from much lower costs of living. For a middle-class person, the American Dream of a big house with a backyard and a couple of cars is much more achievable in low-tax Arizona than in deep-blue Massachusetts.”
The harsh reality is that rising home values and lagging paychecks mean economic options are being constrained, the work/life balance in many non-traditional population centers is attractive for a growing number of people, including our recession refugees. Many believe that in today’s world it makes sense to live where you want to vacation, where home prices and taxes are low, where traffic and pollution are not overwhelming, and where employment options are open and attractive.
As an example, a 2013 study by PwC found that “unlike past generations, who put an emphasis on their careers and worked well beyond a 40-hour work week in the hope of rising to higher-paying positions later on, millennials are not convinced that such early career sacrifices are worth the potential rewards. A balance between their personal and work lives is more important to them.”
Not only are work/life balance equations changing, so are housing preferences.
NAHB assistant vice president of research Rose Quint says growing numbers of first-time buyers will enter the market in 2015 because of the large number of jobs created in recent years. However, she argues that younger, first-time buyers “will demand smaller, more affordable homes.”
According to the NAHB, the least likely new home features in coming years “include high-end outdoor kitchens with plumbing and appliances and two-story foyers and family rooms.”
Translation: There’s a demand for less expensive homes.
“Consumers don’t like them anymore, so builders aren’t going to build them,” Quint said.
That people are packing vans and moving to distant lands and smaller homes is hardly surprising; it’s what people have always done in an effort to improve their circumstances. Think of the migrations to the U.S. from overseas or the Depression-era flights from the Dust Bowl to California.
Such transitions are a good thing because they reduce crowding in the most-popular metro areas and help smaller cities and towns grow. It’s a measure of our national wealth — our real national wealth — that people have choices.
Migrations and Wealth
Economists have traditionally said that wealth is derived from land, labor, capital and entrepreneurial ability but now the whole concept has begun to be re-thought. Simply put, location is no longer so important.
What really makes recession migrations possible is the changing nature of wealth. You don’t have to live near a river or a harbor to generate an income because with the Internet and an information-based economy you can live anywhere.
“We still see finite ‘land’ as the key factor of production,” write retired Lt. Gen. Clarence E. McKnight Jr. and Bijan R. Kian in the Huffington Post. “Physical resources are still important, but information and knowledge are the new sources of power and wealth. The ground is shifting beneath our feet.”
In a sense people are trying to figure out what the new economics of the Internet Era really mean. For millions of Americans such things as the 40-hour work week, a life-long career with one company, and a need to live in a particular location are as dead as dial phones and typewriters. It’s not a rejection of the old economy, instead people are trying to see where they best fit in changing times, times with new options and opportunities.