Home prices are crossing the line again. After an epic housing crash, where values plummeted nationally by almost 35 percent, the nation is seeing new highs again. The median price of an existing home sold in May hit a record $239,700, according to the National Association of Realtors, which began tracking prices in 1968.
"We are seeing flashing yellow lights on affordability. People who are currently renting and want to convert into ownership — major difficulty," said Lawrence Yun, chief economist of the NAR. "Home prices are rising way too fast compared to people's income and wage growth."
The higher median price, where half the homes sold lower and half sold higher, in part reflects the fact that there is more sales activity on the higher end of the market. Other price indexes that measure repeat sales of similar homes show that, nationally at least, prices are still about 10 percent below the peak of 2006.
Some local markets, however, are far more frothy. San Francisco home prices set a new record in May for the second month in a row. The median price in the Bay Area was $700,000, according to CoreLogic. Orange County, California, also surpassed its peak, as have major metro markets in Texas, where home prices didn't fall as drastically during the housing crash.William Andrew | Getty Images
"The tight supply of homes on the market continues to constrain sales, while low mortgage rates and job growth help fuel healthy demand. This results in a pressure cooker effect, and the market's traditional pressure release valve — new home construction — isn't helping much, given that new home sales are running more than 40 percent below historically normal levels," wrote Andrew LePage, research analyst at CoreLogic.
In 2015, more than a million new households were created, but only 620,000 new housing units were completed, according to an analysis by the Urban Institute. That created a shortage of just more than 430,000 units. The shortage has put upward pressure on both home prices and rents — "a trend that will continue for the foreseeable future absent imminent policy changes," according to the study.
Affordability is the largest factor now holding back a more robust housing recovery. While housing should be pushing overall economic growth, it is not, due to the meager activity in home construction. Rental demand has been fueling most of the construction activity, but multifamily housing starts are starting to slow, as most of the activity was in higher-priced, urban rentals, where supply is now high.
Still the number of cost-burdened renters is at a historic high. From 2008 to 2014, that number rose by 3.6 million to 21.3 million burdened renter households, according to an annual report titled, "The State of the Nation's Housing," released this week by the Joint Center for Housing Studies of Harvard University.
"While nearly universal among lowest-income households, cost burdens are rapidly spreading among moderate-income households as well, especially in higher-cost coastal markets," according to the report.
When renters are struggling to make the monthly payment, they are unable to save for a down payment on a home; homes in some markets may be more affordable than rent, but if the renter can't come up with that down payment, the opportunity for lowering monthly costs vanishes.
Homebuilders, meanwhile, are touting the return of the first-time buyer; both KB Homes and Lennar reported better-than-expected quarterly earnings this week, and both have entry-level products. Prices, however, are still rising for these builders, and increasing production is difficult due to market factors.
"Land and labor shortages will continue to be limiting factors and will constrain supply and restrict the ability to quickly respond to growing demand, while the mortgage market and higher rents will continue to constrain that demand," said Lennar CEO Stuart Miller on the earnings conference call with analysts.
The mortgage market today is still considered tight by historical standards. Low interest rates have helped some buyers, but only those who have good enough credit to be in the market at all. Some argue that low rates have contributed to higher home prices, as buyers can qualify for more house. That rate cushion will not be forever.
"We are facing housing affordability challenges already with low mortgage rates, but what happens when the rates begin to rise?" wondered Yun.