The housing market is starting to overheat. Again.
According to the latest BLS data, average hourly wages for all US workers in November rose at a relatively brisk 2.7% relative to the previous year, if below the Fed’s “target” of 3.5-4.5% as countless economists are unable to explain how 4.1% unemployment, and “no slack” in the economy fails to boost wage growth. Another problem with tepid wage growth, in addition to crushing the Fed’s credibility, is that it keeps a lid on how much overall price levels can rise by, i.e. inflation. Meanwhile, with record global debt, it has been the Fed’s imperative to boost inflation at any cost to inflate away the debt overhang, however weak wages have made this impossible.
Well, not really.
Because a quick look at US housing shows that while wages may be growing at roughly 2.7%, according to the latest Case Shiller data, 18 of 20 metro areas in the US saw home prices grow at a higher pace, while 16 of 20 major U.S. cities experienced home price growth of 5.4% or higher, double the average wage growth, and something which even the NAR has been complaining about with its chief economist Larry Yun warning that as the disconnect between prices and wages becomes wider, homes become increasingly unaffordable for most Americans.
Confirming the recent jump in home prices, at the national level in February home prices for the Top 20 metro areas soared 6.8% YoY according to Case Shiller, the fastest rate since June 2014…
… and hitting a new all time high nationwide.
And while this should not come as a surprise – considering we have pointed it out on numerous occasions in the past – one look at the chart below confirms that something very troubling is taking place in San Francisco, which has either become “Vancouver South” when it comes to Chinese hot money laundering, or the second housing bubble has finally arrived on the West Coast. And while according to Case-Shiller data, home prices in San Francisco rose “only” 10.1% Y/Y, a more accurate breakdown of San Fran housing prices from Paragon Real Estate indicates a record 24% annual increase in San Francisco home prices, which increased by $110,000 in just the past quarter.
Behold: a housing bubble…
Also worth keeping an eye on: price appreciation in Sin City has quietly surged in recent months, and in February home prices jumped 11.6% Y/Y, the highest annual increase in years. Considering Las Vegas was the epicenter of the last housing bubble when prices exploded higher only to crash, it may be a good idea to keep a close eye on price tendencies in this metro area for a broader confirmation of the second housing bubble, than just the microcosm that is San Francisco.
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Meanwhile, for those looking to buy for the first time, conditions have never been worse. Growth in property values is outpacing wage gains and limiting affordability, representing a major headwind for first-time buyers, and the broader market.
Finally, putting the above data in context, here are two charts courtesy of real-estate expert Mark Hanson, the first of which shows how much household income increase is needed to buy the median priced home in key US cities…
… while the next chart shows the divergence between actual household income, and the income needed to buy the median priced house.