Real Estate Data for the Rest of Us

articles about “Jed Kolko

What Falling Oil Prices Mean for Home Prices

The recent plunge in oil prices could cause home prices to slip in the oil-producing markets of Texas, Oklahoma, Louisiana, and elsewhere. But it typically takes two years for oil prices to fully affect home prices in those markets. At the same time, lower oil prices could boost home values in the Northeast and Midwest.

Jed Kolko, Chief Economist
January 8, 2015

The Trulia Price Monitor and the Trulia Rent Monitor are the earliest leading indicators of housing price and rent trends nationally and locally. They adjust for the changing mix of listed homes and show what’s really happening to asking prices and rents. Asking prices lead sales prices by approximately two or more months. As a result, the Monitors reveal trends before other price indexes do. Here then is the scoop on where prices and rents are headed.

Asking Prices Slowed in December, Rising 0.5% Month-Over-Month

Nationwide, asking prices on for-sale homes were up 0.5% month-over-month in December, seasonally adjusted — a slowdown after larger increases in September, October, and November. Year-over-year, asking prices rose 7.7%, down from the 9.5% year-over-year increase in December 2013. Asking prices increased year-over-year in 97 of the 100 largest U.S. metros.

December 2014 Trulia Price Monitor Summary
% change in asking prices # of 100 largest metros with asking-price increases % change in asking prices, excluding foreclosures
Month-over-month,
seasonally adjusted
0.5% N/A 0.7%
Quarter-over-quarter,
seasonally adjusted
3.4% 87 3.7%
Year-over-year 7.7% 97 8.1%
Data from previous months are revised each month, so current data reported for previous months might differ from previously reported data.

Where and When Falling Oil Prices Will Hurt — Or Help — Home Prices

Four of the five markets where asking prices rose most year-over-year are in the South, including Atlanta, Cape Coral-Fort Myers, North Port-Sarasota-Bradenton, and Deltona-Daytona Beach-Ormond Beach. Of the top 10, four are in the Midwest, including Cincinnati, Detroit, Lake-Kenosha Counties, and Indianapolis. Among markets with the largest asking price increases, Houston stands out for having a large local oil industry, accounting for 5.6% of jobs there.

 

  Where Prices Increased Most in December
# U.S. Metro Y-o-Y % asking price change, Dec 2014 % of jobs in oil-related industries
1 Atlanta, GA 15.9% 0.3%
2 Cape Coral-Fort Myers, FL 15.5% 0.1%
3 North Port-Sarasota-Bradenton, FL 15.0% 0.1%
4 Cincinnati, OH 14.8% 0.1%
5 Deltona-Daytona Beach-Ormond Beach, FL 14.7% 0.1%
6 Oakland, CA 14.5% 0.4%
7 Houston, TX 13.4% 5.6%
8 Detroit, MI 12.9% 0.6%
9 Lake-Kenosha Counties, IL-WI 12.7% 0.1%
10 Indianapolis, IN 12.6% 0.2%
Note: among 100 largest metros. Employment in oil-related industries is from County Business Patterns, 2012 (see note at end of post). To download the list of asking home price changes for the largest metros: Excel or PDF.

metro map dec 2014

Only Bakersfield and Baton Rouge have an even higher employment share in oil-related industries than Houston. Oklahoma City, Tulsa, New Orleans, and Fort Worth round out the seven large metros where oil-related industries account for at least 2% of employment. It’s not until you look at smaller metros that you find oil-related industries representing a larger employment share. In Williston, ND, and Midland, TX, they account for almost 30% of local jobs.

oil country map dec 2014

On average, in the seven large metros where oil-related jobs are at least 2% of the total, home prices rose 10.5% year-over-year — faster than the 7.7% increase for the 100 largest metros overall.

Home Price Changes in Top Oil-Employment Markets
# U.S. Metro Y-o-Y % asking price change, Dec 2014 % of jobs in oil-related industries
1 Bakersfield, CA 12.4% 6.9%
2 Baton Rouge, LA 3.0% 6.1%
3 Houston, TX 13.4% 5.6%
4 Oklahoma City, OK 6.3% 4.3%
5 Tulsa, OK 10.1% 3.7%
6 New Orleans, LA 7.3% 2.6%
7 Fort Worth, TX 10.2% 2.5%
8 Gary, IN 7.3% 1.8%
9 Wichita, KS 5.3% 1.4%
10 Toledo, OH 10.2% 1.0%
Note: among 100 largest metros. Employment in oil-related industries is from County Business Patterns, 2012 (see note at end of post).

Oil prices have plunged from over $100/barrel in July 2014 to around $50/barrel in early January 2015, threatening oil-producing economies around the world. Within the U.S., big oil price drops have historically been associated with job losses and falling home prices in energy-producing regions. In particular, plummeting oil prices in the 1980s were followed by declines in employment and home prices in Houston, Oklahoma City, Tulsa, New Orleans, and other nearby markets.

We looked at year-over-year trends in oil prices, jobs, and home prices from 1980 to the present in the 100 largest metros and found that:

  1. In oil-producing markets, home prices tend to follow oil prices, but with a lag. For instance, in the 1980s, the largest year-over-year oil price declines were in early- and mid-1986. In Houston, job losses were steepest in late 1986. But home prices didn’t slide most until the third quarter of 1987. Since 1980, employment in oil-producing markets has followed oil-price movements roughly two quarters later and home prices have followed oil-price movements roughly two years later.
  2. While home prices and oil prices move in the same direction in oil-producing markets, they tend to move in the opposite direction in many other markets. Cheaper oil lowers the costs of driving, heating a home, and other activities, boosting local economies outside oil-producing regions. In the Northeast and Midwest especially, home prices tend to rise after oil prices fall. The specific markets where home prices get the biggest jolt depend on which years we analyze.

This history offers three lessons for today’s housing market. First, any negative impact of falling oil prices on home prices should be concentrated in oil-producing markets in Texas, Oklahoma, Louisiana, and other places with large oil-related industries. Second, in these markets, oil prices won’t tank home prices immediately. Rather, falling oil prices in the second half of 2014 might not have their biggest impact on home prices until late 2015 or in 2016. Third, falling oil prices will probably help local economies and home prices in markets that lack oil-related industries.

Rental Affordability Toughest in Miami, Los Angeles, and New York

Nationwide, rents rose 6.1% year-over-year in December. The least affordable rental markets are Miami, Los Angeles, and New York, where median rent for a two-bedroom unit eats up more than half of the local average wage. Rents are rising faster than the national average in the markets that are already the least affordable. The most affordable large rental markets are St. Louis, Phoenix, and Houston. Although Denver had the largest year-over-year increases, Denver rentals remain more affordable than those in most of the big coastal markets.

Rent Trends in the 25 Largest Rental Markets
# U.S. Metro Y-o-Y % change in rents, Dec 2014 Median rent for 2-bedroom, Dec 2014 Median rent for 2-bedroom as share of average local wage
1 Miami, FL 7.4% 2300 57%
2 Los Angeles, CA 7.0% 2450 53%
3 New York, NY 9.3% 3200 52%
4 Oakland, CA 11.6% 2400 45%
5 San Francisco, CA 10.8% 3600 45%
6 Riverside-San Bernardino, CA 5.0% 1500 44%
7 Orange County, CA 7.4% 2050 44%
8 San Diego, CA 4.1% 1950 42%
9 Cambridge-Newton-Framingham, MA 6.8% 2250 39%
10 Boston, MA 4.3% 2300 39%
11 Newark, NJ 7.1% 2100 37%
12 Chicago, IL 6.0% 1750 37%
13 Baltimore, MD 8.7% 1550 35%
14 Washington, DC 2.9% 2000 34%
15 Denver, CO 14.1% 1500 31%
16 Philadelphia, PA 7.5% 1500 31%
17 Seattle, WA 6.1% 1700 31%
18 Portland, OR 8.8% 1300 30%
19 Tampa-St. Petersburg, FL 7.5% 1100 29%
20 Dallas, TX 5.4% 1400 29%
21 Atlanta, GA 5.9% 1250 28%
22 Minneapolis-St. Paul, MN 3.2% 1300 28%
23 Houston, TX 3.1% 1400 27%
24 Phoenix, AZ 8.6% 1050 26%
25 St. Louis, MO 8.5% 900 22%
Note: average local wage is from the Quarterly Census of Employment and Wages for the year up to 2014 Q2.

The next Price and Rent Monitors are scheduled to be released on Tuesday, February 10.

Notes:

The share of jobs in oil-related industries is based on County Business Patterns, 2012. Oil-related industries include NAICS codes 211, 213111, 213112, 2212, 23712, 32411, 333132, 4247, 4861, 4862,and 48691; these cover oil and gas extraction, drilling, support operations, refineries, machinery construction, pipeline construction, and pipeline transportation. Nationally, 0.9% of jobs are in these oil-related industries. For counties where the exact industry employment level was suppressed for confidentiality reasons, we estimated employment based on the establishment size distribution.

To estimate the relationship among trends in oil prices, employment, and home prices, we identified the lags that yielded the highest correlations between the time series for individual metros. Because the results are sensitive to the time period analyzed and other assumptions, we are reporting only the broad results that hold under various assumptions.

This post (and future Trulia Trends posts) uses new government metropolitan area definitions, as explained in this FAQ.

The Trulia Price Monitor and the Trulia Rent Monitor track asking home prices and rents on a monthly basis, adjusting for the changing composition of listed homes, including foreclosures provided by RealtyTrac. The Trulia Price Monitor also accounts for regular seasonal fluctuations in asking prices in order to reveal underlying price trends. The Monitors can detect price movements at least three months before the major sales-price indexes. Historical data are revised monthly. Thus, historical data presented in the current release are the best comparison with current data. Our FAQs provide the technical details.

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White Christmas Is Rare – But At Least It’s Affordable

81% of Americans live in counties where Christmas probably won’t be white. Among large metros, snowfall or snow cover on Christmas is most likely in Minneapolis-St. Paul, Buffalo, and Syracuse.

Jed Kolko, Chief Economist
December 17, 2014

Dreaming of a white Christmas? Keep dreaming. For most Americans, chances aren’t great for Christmastime snow. From our perch in snowless San Francisco, we crunched detailed weather data from the National Climatic Data Center for 1980–2013 to discover where Christmases tend to be white. But why should you listen to me, a Jewish guy in California? As it happens, I know from snow. I grew up in Rochester, NY, which is so snowy and overcast that as a child I thought the color of the sky was white, not blue. As we’ll see, the numbers back me up.

It turns out—who knew?—that there’s no universally agreed-upon definition of a white Christmas, according to our exhaustive research (i.e., checking Wikipedia). For Americans, white Christmas means an inch or more of snow on the ground. But, as my colleague who hails from down the Thruway in snowbound Buffalo pointed out, that could mean grimy old snow that fell days earlier. He prefers the British definition, which is any fresh snowfall on Christmas Day.

We were feeling generous with holiday spirit, so for this analysis we defined white Christmas as either snowfall of any amount or a snow cover of at least an inch. With that, we tallied the percentage of white Christmases from 1980 to 2013 in counties and metros across the country.

A White Christmas is Hard to Find                                  

Sorry to say, your Christmas may be merry, but it probably won’t be white. Half of American households live in counties where fewer than 10% of Christmases since 1980 have been white. And just 19% of households live where at least 50% of Christmases have been white. America’s white Christmas belt runs from the upper Midwest across upstate New York to Maine, especially along the Great Lakes, as well as through the Rockies and other mountainous areas. Much of the white Christmas belt is thinly populated. Consider this: Measured by land area, an impressive 40 percent of the U.S. has a better than 50-50 chance of having a white Christmas—30 percent if we exclude big, snowy Alaska. But just 19% of households live in those wintry regions.

WhiteXmasMap

White Christmases Cost Less Green

So most of us won’t see snow on Christmas. But if you want to make your dreams of a white Christmas come true, you might be able to afford it. Housing prices are comparatively low in the metros with the snowiest Christmases, particularly Buffalo, Rochester, and Syracuse in upstate New York, as well as Grand Rapids, MI. What’s the white Christmas capital of the U.S.? It’s Minneapolis-St. Paul, where Christmases are white 79% of the time. Home asking prices in these winter wonderlands are far below what’s typical on the coasts and below the national average for large metros.

The 10 Metros Where Christmas Is Most Likely To Be White
# Metro % of Christmases, 1980-2013, with any snowfall or 1” snow cover Median asking price per square foot, $
1 Minneapolis-St. Paul, MN-WI 79% 125
2 Buffalo, NY 75% 94
3 Syracuse, NY 71% 89
4 Salt Lake City, UT 70% 122
5 Grand Rapids, MI 69% 85
6 Rochester, NY 62% 85
7 Warren-Troy-Farmington Hills, MI 58% 117
8 Albany, NY 57% 136
9 Milwaukee, WI 55% 114
10 Worcester, MA 53% 145
Note: Among the 100 largest metros. Averaging over those 100 metros, the national median asking price is $160 per square foot.

As the figure below shows, white Christmases are rare in more expensive metros. And in the priciest markets, in California and Hawaii, they’re unheard of. The only expensive markets that have at least a 25% chance of a white Christmas are Boston and neighboring Middlesex County and Peabody.

WhiteXmasScatter

After this year’s polar vortex, East Coasters might feel like they deserve a white Christmas—right? Here’s why they’re not on the whitest-Christmas list. Shoveling deeper into the data, we found that Boston, New York, Philadelphia, Washington DC, and other metros on the eastern seaboard tend to get most of their snowfall later in winter. In contrast, upstate New York, the upper Midwest, and the Rocky Mountain metros tend to get more of their annual snow dump a little earlier — including around Christmastime. One reason for the difference is that the Great Lakes region gets lake-effect snow caused by colder air passing over warmer water. That’s common early in winter before the lakes get cold or freeze. Plus, the snow that does fall is more likely to stick where the ground and the air are cold, and the Atlantic Ocean keeps those East Coast metros a little more temperate until later in the winter.

Whether or not your dreams include a white Christmas, all of us at the Trulia Trends team hope they come true. Merry Christmas—or Happy Holidays if you live in a region where that’s more appropriate—and Happy New Year in 2015!

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Housing’s Millennial Mismatch

Asking prices are rising faster in Gen X, boomer, and senior markets than in millennial markets. But there’s a mismatch in where young adults live versus where they can afford to buy a home. For many millennials, homeownership will require moving to a cheaper market.

Jed Kolko, Chief Economist
December 9, 2014

The Trulia Price Monitor and the Trulia Rent Monitor are the earliest leading indicators of housing price and rent trends nationally and locally. They adjust for the changing mix of listed homes and show what’s really happening to asking prices and rents. Asking prices lead sales prices by approximately two or more months. As a result, the Monitors reveal trends before other price indexes do. With that, here’s the scoop on where prices and rents are headed.

Asking Prices Accelerated in November, Rising 7.4% Year-over-Year

Nationwide, asking prices on for-sale homes jumped 1.5% month-over-month in November, seasonally adjusted — a surprisingly large increase. Future months will tell whether this was a blip or the beginning of a sustained climb. Year-over-year, asking prices rose 7.4%, down from the 10.3% year-over-year increase in November 2013. Asking prices rose year-over-year in 98 of the 100 largest U.S. metros — everywhere but Little Rock and New Haven.

November 2014 Trulia Price Monitor Summary
% change in asking prices # of 100 largest metros with asking-price increases % change in asking prices, excluding foreclosures
Month-over-month,
seasonally adjusted
1.5% N/A 1.6%
Quarter-over-quarter,
seasonally adjusted
3.4% 95 3.5%
Year-over-year 7.4% 98 7.3%
Data from previous months are revised each month, so current data reported for previous months might differ from previously reported data.

Prices Rising Fast in Florida, Slowest in Favorite Millennial Markets

Four of the 10 metros where asking prices rose most year-over-year were in Florida. These Sunshine State markets have older populations, and they all have a lower share of millennials than the national average of 21% and a higher share of baby boomers than the average of 24%. In fact, only one of the 10 markets with the largest price increases in November has a higher share of millennials than the national average—and only slightly (Las Vegas, at 22%).

Where Prices Increased Most in November
# U.S. Metro Y-o-Y % asking price change, Nov 2014 % of population age 20-34 (Millennials) % of population age 50-69 (Boomers)
1 Ventura County, CA 17.2% 20% 24%
2 Palm BayMelbourneTitusville, FL 15.2% 16% 30%
3 North PortBradentonSarasota, FL 14.7% 14% 30%
4 Oakland, CA 13.4% 21% 24%
5 Cincinnati, OH-KY-IN 13.4% 20% 25%
6 Cape CoralFort Myers, FL 13.3% 16% 29%
7 LakelandWinter Haven, FL 13.0% 18% 25%
8 Las Vegas, NV 12.9% 22% 23%
9 Detroit, MI 12.9% 20% 25%
10 Atlanta, GA 12.9% 21% 22%
National average 7.4% 21% 24%
Note: among 100 largest metros. Population shares based on 2013 Census population estimates. To download the list of asking home price changes for the largest metros: Excel or PDF

metro map nov 2014

To see how the age distribution of a metro’s population relates to home prices, we identified the 10 markets with the highest shares of each of four distinct generations: millennials (age 20–34); Gen X (age 35–49); boomers (age 50–69); and seniors (age 70 and up). (See note.) In the 10 markets where millennials account for the largest share of the population, including Austin, San Diego, and Virginia Beach-Norfolk, the average year-over-year price increase was 6.1% — below the 7.4% national increase. Markets with the highest shares of Gen Xers, including Raleigh, San Francisco, and San Jose, averaged price increases of 9.4% — highest among the four age groups. Prices in the favorite markets of seniors, most of which are in Florida, rose 8.6% — also above the national increase.

GenerationalHomePrices

The Millennial Mismatch in Housing Affordability

When young adult renters are asked if they will buy a home someday, a whopping 93% say yes. You’d think it would be good news for them that prices are rising more slowly in the markets where they currently live. Not so fast though. Prices might be rising more slowly in millennials’ favorite metros. But affordability is nonetheless a big challenge in those markets.

To see this, compare the millennial population share in each metro with the percentage of homes for sale that a typical millennial household can afford (from our most recent Middle Class Affordability report — see note below on how we define affordability). In metros with higher millennial shares, homeownership tends to be less affordable for this group. For instance, in Austin, Honolulu, New York, and San Diego, 20–34 year-olds account for at least 23.5% of the population, putting those metros in the top 10 for millennial share. But fewer than 30% of homes for sale in those markets are within reach of the typical millennial household. Some markets with a high millennial share are more affordable, including Oklahoma City and Baton Rouge, but they’re the exception (see note).

LiveVsAfford[2]

Call it the “millennial mismatch.” Millennials can afford markets where they don’t live, but they can’t afford many of the markets where they do live. Many millennials who hope to buy someday will be priced out of the market where they live now. They’ll face a tough choice: Do they keep renting or move to a cheaper market?

Rents Gains Easing Slightly in Most Large Markets

Rents continued to climb. Nationwide, rents rose 6.1% year-over-year in November. Still, rent gains have cooled since August in 14 of the 25 largest rental markets, including the Northern California markets of San Francisco, Oakland, and Sacramento. In November, Denver had the steepest increases in the country, though the typical two-bedroom unit there still rents for less than half of what it would cost in San Francisco or New York. But rent increases could slow next year if new apartment construction finally catches up with demand.

Rent Trends in the 25 Largest Rental Markets
# U.S. Metro Y-o-Y % change in rents, Nov 2014 Y-o-Y % change in rents, Aug 2014 Median rent for 2-bedroom, Nov 2014
1 Denver, CO 14.2% 12.7% 1550
2 San Francisco, CA 12.2% 13.4% 3600
3 Oakland, CA 11.9% 14.3% 2450
4 Baltimore, MD 9.3% 8.1% 1550
5 Phoenix, AZ 8.5% 8.1% 1050
6 New York, NY-NJ 8.3% 5.4% 3400
7 Sacramento, CA 8.2% 13.4% 1200
8 Portland, OR-WA 7.8% 3.5% 1300
9 Philadelphia, PA 7.5% 9.2% 1550
10 TampaSt. Petersburg, FL 7.4% 5.5% 1150
11 Miami, FL 7.3% 9.0% 2300
12 Los Angeles, CA 7.3% 8.2% 2500
13 Seattle, WA 7.3% 8.5% 1750
14 Orange County, CA 7.3% 4.7% 2100
15 St. Louis, MO-IL 7.3% 6.3% 950
16 Las Vegas, NV 6.5% 5.4% 950
17 Chicago, IL 5.9% 7.2% 1700
18 RiversideSan Bernardino, CA 5.8% 6.1% 1550
19 Dallas, TX 5.7% 4.5% 1400
20 Atlanta, GA 5.6% 7.5% 1200
21 Houston, TX 4.2% 4.2% 1400
22 San Diego, CA 4.0% 6.5% 2000
23 Boston, MA 3.8% 4.5% 2300
24 Washington, DC-VA-MD-WV 3.4% 3.6% 2000
25 Minneapolis-St. Paul, MN-WI 1.8% 1.7% 1300
Note: among 100 largest metros. Population shares based on 2013 Census population estimates. To download the list of rent price changes for the largest metros: Excel or PDF

Note: Data on share of metro population in each age group are from the Census’s 2013 county population estimates. Because the Census reports county population estimates by age in 5-year buckets (20–24, 25–29, etc.), we defined the four age groups as 20–34 (millennials), 35–49 (Gen X), 50–69 (boomers), and 70+ (seniors).

The correlation for the data shown in the scatterplot between millennial share and homeownership affordability for millennials is -0.28 (-0.48 when weighted by metro number of households), which is statistically significant at the 5% level.

We measure affordability as the share of homes for sale on Trulia within reach of the typical millennial household. Our standard is whether the total monthly payment, including mortgage, insurance, and property taxes, is less than 31% of the metro area’s median income for households headed by millennials. The total monthly cost includes the mortgage payment assuming a 4.2% 30-year fixed rate mortgage with 20% down, property taxes based on average metro property tax rate, and insurance. We chose 31% of income as the affordability cutoff to be consistent with government guidelines for affordability.

The Trulia Price Monitor and the Trulia Rent Monitor track asking home prices and rents on a monthly basis, adjusting for the changing composition of listed homes, including foreclosures provided by RealtyTrac. The Trulia Price Monitor also accounts for regular seasonal fluctuations in asking prices in order to reveal underlying price trends. The Monitors can detect price movements at least three months before the major sales-price indexes. Historical data are revised monthly. Thus, historical data presented in the current release are the best comparison with current data. Our FAQs provide the technical details.

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Housing in 2015: Consumers Upbeat, but Recovery Faces a Tricky Handoff

Consumers think 2015 will be a better year than 2014, especially for selling a home. But the recovery will slow as the rebound effect fades before fundamentals become strong. Key markets to watch are in the Northeast, South, and West.

Jed Kolko, Chief Economist
December 3, 2014

What does 2015 have in store for the housing market? Nine years after the housing bubble peaked and three years after home prices bottomed, the boom and bust still cast a long shadow. None of the five measures we track in our Housing Barometer is back to normal yet, though three are getting close. The rebound effect drove the recovery after the bust, but is now fading. Prices are no longer significantly undervalued and investor demand is falling. Ideally, strong economic and demographic fundamentals like job growth and household formation would take up the slack. But the virtuous cycle of gains in jobs and housing is relatively weak, and that will slow the recovery in 2015. All the same, consumers are optimistic, according to our survey of 2,008 American adults conducted November 6-10, 2014.

Consumers Expect 2015 To Be Better, Especially for Selling a Home

Consumers are as optimistic about the housing market as at any point since the recovery started. Nearly three-quarters — 74% — of respondents agreed that home ownership was part of achieving their personal American Dream – the same level as in our 2013 Q4 survey and slightly above the levels of the three previous years. For young adults, the dream has revived: 78% of 18-34 year-olds answered yes to our American Dream question, up from 73% in 2013 Q4 and a low of 65% in 2011 Q3.

AmericanDream

Furthermore, 93% of young renters plan to buy a home someday. That’s unchanged from 2012 Q4 despite rising home prices and worsening affordability.

Which real estate activities do consumers think will improve in 2015? All of them – but especially selling. Fully 36% said 2015 will be much or a little better than 2014 for selling a home. Just 16% said 2015 will be much or a little worse, a difference of 20 percentage points. The rest of the respondents said 2015 would be neither better nor worse, or weren’t sure. More consumers said 2015 will be better than 2014 for buying too. But the margin over those who said 2015 will be worse was not as wide.

BetterorWorse

Despite this optimism, barriers remain to homeownership. Saving for a down payment is still the highest hurdle, as it was last year, followed by poor credit and qualifying for a mortgage. Not having a stable job has become considerably less of an obstacle, dropping to 24% this year compared with 36% last year thanks to the recovering job market. But affordability has become a bigger obstacle. Some 32% of respondents cited rising home prices, compared with 22% last year.

BiggestObstacle

Housing Recovery in 2015: Rebound Effect to Fade Before Fundamentals Can Take Over

Different engines power each stage of the housing recovery. During the early years – roughly 2012 to 2014 – the rebound effect drove the recovery. Investors and other buyers scooped up undervalued homes and took advantage of foreclosures and short sales, boosting overall sales volumes. Local markets hit hardest in the housing bust posted the largest price rebounds. Now, though, the rebound effect is fading. Price levels and price changes are both approaching normal, foreclosure inventories are dwindling, and investors are pulling back. This is inevitable as the market improves and therefore shifts to slower, more sustainable price increases and a healthier mix of home sales.

So what replaces the rebound effect in the next stage of the housing recovery? The market increasingly depends on fundamentals such as job growth, rising incomes, and more household formation. But here’s the hitch: These fundamental drivers of supply and demand haven’t returned to full strength. They aren’t able to fully take the reins from the rebound effect. Importantly, the share of young adults with jobs is still less than halfway back to normal, many young adults are still living with their parents, and income growth is sluggish. This points to a tricky handoff, and means housing activity in 2015 might disappoint by some measures, though the rental market will remain vigorous.

Here’s what we expect:

  • Price gains slow, but affordability worsens. Price gains slowed in 2014 and we’ll see more of the same in 2015. In October 2014, prices increased4% year-over-year, down from 10.6% in October 2013. The slowdown has been especially sharp in metros that had a severe housing bust followed by a big rebound. Now, prices nationwide are just 3% undervalued relative to fundamentals. That leaves fewer bargains and scant room for prices to rise without becoming overvalued. What’s more, with consumers expecting 2015 to be a better year to sell than 2014, more homes should come onto the market, cooling prices further. Nevertheless, despite slowing price gains, home-buying affordability will worsen in 2015 for two reasons. First, even these smaller price increases will almost surely outpace income growth. In 2013, incomes rose just 1.8% year-over-year in nominal terms, and a negligible 0.3% after adjusting for inflation. Second, the strengthening economy and the Fed’s response should push up mortgage rates.
  • The rental market will keep burning bright. Next year will see strong rental demand and lots of new supply. The demand will come from young people leaving homes belonging to parents or roommates and renting their own places. Until now, they’ve been slow to leave the nest. But the 2014 job gains for 25-34 year-olds should lead to the rise in household formation we’ve been waiting years for. At the same time, the 2014 apartment construction boom will mean more supply in 2015 since multi-unit buildings take about a year to build. Will rent gains slow? Probably – provided that this new supply keeps up with formation of renter households. This surge of renters will probably cause the homeownership rate to fall. To be sure, the ranks of homeowners will probably rise. But an even larger number of young adults will enter the housing market as renters.
  • Single-family starts and new home sales could disappoint. While apartment construction is breaking records, single-family housing starts and new home sales are still not much better than half of normal levels. They’ll improve in 2015, but not as much as we’d like. Our consumer survey suggests more people will try to sell existing homes. That would add to the supply on the market and possibly reduce demand for new homes. Also, the strongest source of housing demand will be young people getting jobs and forming households. But they’ll be moving into rentals and saving for a down payment rather than buying homes right away. Finally, the vacancy rate for single-family homes is still near its recession high, which discourages new construction. The apartment construction boom shows that where there’s demand, builders will build. But buyer demand for single-family homes simply hasn’t recovered enough to support near-normal levels of single-family starts or new home sales.

If these predictions for 2015 sound similar to our predictions for 2014, you’re right. As the rebound effect fades and fundamentals take over, the recovery gets slower and the market starts to look more similar from one year to the next. But there’s good news here. Even though the recovery remains unfinished, the housing market is becoming more stable and more certain for buyers, sellers, and renters.

Markets to Watch in 2015

As the rebound effect fades, our 10 markets to watch have strong fundamentals for housing activity. These include solid job growth, which fuels housing demand, and a low vacancy rate, which spurs construction. We gave a few extra points to markets with a higher share of millennials. These young adults are getting back to work and that will drive household formation and rental demand. We didn’t include markets where prices looked at least 5% overvalued in our latest Bubble Watch report. Here are our markets to watch, in alphabetical order:

  1. Boston, MA
  2. Dallas, TX
  3. Fresno, CA
  4. Middlesex County, MA
  5. Nashville, TN
  6. New York, NY-NJ
  7. Raleigh, NC
  8. Salt Lake City, UT
  9. San Diego, CA
  10. Seattle, WA

 

MarketstoWatch

These markets are spread across the country: Boston, Middlesex County (just west of Boston), and New York in the Northeast; Dallas, Nashville, and Raleigh in the South (the Census considers Texas part of the South); and Fresno, Salt Lake City, San Diego, and Seattle in the West. No Midwestern metros make the list because they generally have slower job growth and higher vacancy rates than other markets, even though many are quite affordable and prices are rebounding.

In 2015, more markets will settle back into their long-term housing patterns. Fast-growing markets that boomed last decade, collapsed in the bust, and then rebounded are now leveling off. Even the markets that have been slowest to recover and have struggled longest are seeing foreclosure inventories decline and the sales mix moving back toward normal.

At the same time, first-time homeownership, single-family starts, and new home sales won’t come close to fully recovering in 2015. But if 2015 brings strong job growth, big income gains, and the long-awaited jump in household formation, then 2016 could be the year when we see a major turnaround in homeownership and single-family construction.

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Where Is Homeownership Within Reach of the Middle Class and Millennials?

Despite high household incomes, San Francisco is the least affordable metro, with just 15% of homes within reach of the middle class. Affordability has deteriorated over the past year in Austin and Miami. The most affordable markets are near the Great Lakes.

Jed Kolko, Chief Economist
November 18, 2014

Where can the middle class bear the cost of buying a home? In the past year, affordability has fallen modestly, hurt by rising home prices, but helped by lower mortgage rates. Nationally, 59% of homes for sale are within reach of the middle class, compared with 62% last October. Nonetheless, the big picture is that prices still look undervalued compared with fundamentals and historically low mortgage rates make buying much cheaper than renting. Still, affordability is a growing problem.

We measure affordability as the share of homes for sale on Trulia within reach of a middle-class household. Our standard is whether the total monthly payment, including mortgage, insurance, and property taxes, is less than 31% of the metro area’s median household income. (See note below.) We define middle class separately for each metro based on the local median household income. Thus, what we consider affordable varies from market to market.

For instance, in metro Atlanta, median household income is $55,000. Homes priced under $276,000 are affordable based on the 31% guideline. On November 7, 2014, 71% of the homes for sale in Atlanta were listed for less than $276,000. That means that more than two-thirds of metro Atlanta homes are within reach of the middle class.

Austin and Miami Join California Markets on the Least Affordable List

The five most affordable markets are in Ohio, Indiana, and upstate New York. In those markets, more than 80% of homes for sale are within reach of the middle class. The South is relatively affordable too, with Birmingham, AL and Columbia, SC among the 10 most affordable markets.

Most Affordable Housing Markets for the Middle Class

# U.S. Metro % of for-sale homes affordable for middle class, Nov 2014 Median size of affordable for-sale homes, Nov 2014 (square feet) % of for-sale homes affordable for middle class, Oct 2013
1 Dayton, OH 85% 1400 85%
2 Rochester, NY 83% 1400 76%
3 Akron, OH 83% 1350 86%
4 Gary, IN 81% 1500 84%
5 Toledo, OH 81% 1350 85%
6 Birmingham, AL 80% 1400 82%
7 Kansas City, MO-KS 79% 1400 80%
8 Camden, NJ 79% 1450 79%
9 Columbia, SC 79% 1700 83%
10 Detroit, MI 79% 1050 83%
Find out how affordable each of the 100 largest metros are for the Middle Class: Excel and PDF

Six of the seven least affordable markets are in California. A middle-class household can afford just 15% of homes for sale in San Francisco and 22% in Los Angeles. In New York, only 25% of homes for sale are within reach. Joining the least affordable list for the first time are Austin and Miami. In Austin, just 40% of homes for sale are within reach of the middle class, down from 50% last fall. Miami has seen a similar drop in affordability. In total, in 20 of the 100 largest metros, middle-class households can afford fewer than 50% of homes.

Least Affordable Housing Markets for the Middle Class

# U.S. Metro % of for-sale homes affordable for middle class, Nov 2014 Median size of affordable for-sale homes, Nov 2014 (square feet) % of for-sale homes affordable for middle class, Oct 2013
1 San Francisco, CA 15% 1050 14%
2 Los Angeles, CA 22% 1250 24%
3 San Diego, CA 25% 1100 28%
4 New York, NY-NJ 25% 1050 25%
5 Orange County, CA 26% 1100 23%
6 San Jose, CA 30% 1200 31%
7 Ventura County, CA 33% 1250 32%
8 Honolulu, HI 38% 700 40%
9 Austin, TX 40% 1800 50%
10 Miami, FL 41% 1150 51%
Find out how affordable each of the 100 largest metros are for the Middle Class: Excel and PDF

metro map

 

Surprisingly, high-income metros are generally less, not more, affordable. Housing prices tend to be so high in metros with high incomes that affordability ends up being worse than in low-income metros. Why? High-income households bid up home prices, and high prices push out lower-income households. In addition, higher-income metros tend to have less new construction than lower-income metros do. As a result, high-income metros such as San Francisco and San Jose are among the least affordable, even after taking income into account.

Bucking the trend are Washington, DC and the Bethesda metro next door, where incomes are high and more than 60% of homes are within reach of the middle class.

HousingAffordability

The Least Affordable Parts of the Least Affordable Metros

Of course, affordability varies within metros. To dig deeper in the least affordable metros, we zoom down one level to look at sub-markets – individual counties or, for enormous counties like Los Angeles, the territories covered by telephone area codes. For example, although metro San Francisco is less affordable than metro New York, the borough of Manhattan is less affordable than the city of San Francisco (see note). In fact, Brooklyn and the San Gabriel Valley (east of downtown Los Angeles) are as unaffordable as the city of San Francisco.

So the next time someone says “Oakland is the new Brooklyn,” remind them that housing costs in Brooklyn actually rival those of San Francisco, not Oakland. In Alameda County, which includes Oakland, 32% of homes are within reach of the middle class – similar to Queens (33%), not Brooklyn (12%).

   Least Affordable Housing Sub-Markets for the Middle Class
# U.S. Sub-Market U.S. Metro % of for-sale homes affordable for middle class, Nov 2014
1 Manhattan NYC 2%
2 Pasadena / San Gabriel Valley (626) LA 11%
3 Brooklyn NYC 12%
4 San Francisco (city= county) SF 12%
5 Westside LA/ Beaches/ Coast (310/424) LA 14%
6 Marin SF 15%
7 Downtown LA (213) LA 16%
8 Napa SF 16%
9 San Fernando Valley (818/747) LA 16%
10 San Mateo SF 17%
Note: sub-markets are counties in most metros, including boroughs in New York, but are area code territories in metros where counties are unusually large.

Just Under Half of Homes are Within Reach of Millennials

For younger adults, affordability is yet a bigger challenge. Households headed by millennials – people younger than 35 – are at the age when people begin to think about buying a home. But their incomes are lower than those of older households. To explore affordability for this group, we use metro median income for millennial-headed households.

Nationwide, just 49% of for-sale homes are within reach of the median-income millennial household, compared with 59% for the median household regardless of age. In 45 of the 100 largest metros, the majority of homes for sale are beyond the reach of the typical millennial household. Those metros include not only expensive coastal markets such as Los Angeles and Honolulu, but also such places as Newark, Tucson, and Tacoma, WA. Austin and Oakland are among the 10 least affordable housing markets for millennials.

One surprise in this analysis: In two of the 100 largest metros – San Francisco and New York — the median income for millennial households is actually higher than median income for all households. Those markets have industries that often pay younger people well. But they also are such expensive markets that even well-paid young people must double up to be able to live there. Many find themselves priced out entirely. Even with those high-income millennials, San Francisco and New York are respectively the least and tenth-least affordable markets for millennials.

Least Affordable Housing Markets for Typical Millennial Household

# U.S. Metro % of for-sale homes affordable for median millennial household, Nov 2014 Median income, millennial households Median income, all households
1 San Francisco, CA 16% 90000 86000
2 Orange County, CA 17% 60000 76000
3 Los Angeles, CA 17% 48000 54000
4 San Diego, CA 18% 52000 61000
5 Ventura County, CA 20% 63000 78000
6 Austin, TX 22% 47000 62000
7 Honolulu, HI 25% 56000 73000
8 San Jose, CA 27% 87000 91000
9 Oakland, CA 27% 61000 76000
10 New York, NY-NJ 28% 60000 57000
Find out how affordable each of the 100 largest metros are for the Middle Class: Excel and PDF

For both millennials and the middle class generally, affordability is worsening. Annual home-price gains have slowed to 6.4% and will probably continue to ease. But that’s still a faster pace than gains in median income, which is rising at roughly the rate of inflation (1.5% in 2013). Plus, mortgage rates are likely to rise from their current low levels. Unless incomes increase substantially, homeownership will slip further beyond the reach of many households.

 

Note: We measure affordability as the share of homes for sale on Trulia on November 7, 2014, within reach of a middle-class household. Our standard is whether the total monthly payment, including mortgage, insurance, and property taxes, is less than 31% of the metro area’s median household income. We define middle class separately for each metro based on the local median household income. The total monthly cost includes the mortgage payment assuming a 4.2% 30-year fixed rate mortgage (versus 4.5% in the October 2013 calculation) with 20% down, property taxes based on average metro property tax rate, and insurance. We chose 31% of income as the affordability cutoff to be consistent with government guidelines for affordability. Both the Federal Housing Administration and the Home Affordable Modification Program use 31% of pre-tax income going toward monthly housing payments for assessing whether a home is within reach for a borrower.

Median household income is calculated from the 2013 American Community Survey (ACS) Public Use Microdata Sample (PUMS) using the 2009 metropolitan area definitions. Metro areas and divisions comprise one or more counties. In our sub-market analysis, we used counties or, in metros with very large counties like Los Angeles, the geographic footprints of telephone area codes.

Millennial households are those where the “reference person” (the head of household) is less than 35 years old.

Household incomes are rounded to the nearest $1000. Square footage is rounded to the nearest 50.

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