April 2019 Housing Affordability Index
MSAs with $400K Median List Price or Less Showing…
April Pending Home Sales
How Do Home Sales Affect the Economy in Your State?
Employment conditions remain broadly positive as of April 2019, with 2.6 million jobs created from one year ago (April 2019 State Employment Monitor). Wages are broadly rising faster than inflation in all industries, except for manufacturing and transportation and warehousing. Employment is also shifting across industries, with an increasing fraction of jobs in health care, education, accommodation & food services, transportation and warehousing, and professional & technical services. What do these trends mean in terms of workforce home affordability?
Share of Mortgage Payment to Income by Industry
Using weekly wage (seasonalized) data released by the Bureau of Labor Statistics, I calculated the share of mortgage payment to income across broad industry categories for a single-worker household paying a 4.5% effective 30-year fixed mortgage rate on a 10 percent down payment mortgage for a $267,300 home (median price). A household who spends more than 30 percent of income on housing (mortgage, maintenance, utilities) is cost-burdened. Because I only calculated the mortgage payment, I compared the mortgage-to-income share with a lower threshold of 25 percent.
Table 1 below shows the mortgage-to-income shares for nonfarm workers. The calculations show that if a household has only one single earner working in the private sector, the household will likely spend 29 percent of income on a mortgage, which makes a home purchase unaffordable. Housing will be most unaffordable for single-earner households in the leisure & hospitality industry (66%), retail trade (47%), other services (31%), education & health services (31%), transportation & warehousing (29%), and manufacturing (25%). This means that other members of the household need to work or contribute to the mortgage payment (e.g., spouse, working adult children, relatives, room renters, etc.) to make a home purchase more affordable. This may help explain the trend towards multi-generational housing where adult children continue to live with their parents, perhaps to both care for their parents and/or to help pay the mortgage.
Workers who are able to afford a home as a single-earner household will likely be those employed in the construction industry (23%, possibly the white-collar employees), professional and business services (23%), wholesale trade (23%), financial activities (21), information services (19%), mining and logging (18%), and utilities (16%).
Job Trend Across Industries Since 2000
Table 2 shows that while workers in financial activities, information services, mining & logging and utilities earn wages that enable them to afford a home as a single-earner household, these industries now account for a smaller fraction of the workforce compared to their shares in 2000. On the other hand, employment in industries that don’t pay as well has been rising: educational services; arts, entertainment, and recreation; health care and social assistance; accommodation and food services, and transportation and warehousing.
The aging of the Baby Boomer population and the increasing use of technology are arguably the largest drivers of the shift in jobs across industries. Health care and social assistance jobs are increasingly in demand with the aging and retirement of Baby Boomers. E-commerce, which now accounts for nine percent of retail sales from less than one percent in 2000, has increased the demand for workers in the transportation and warehousing and dealt a blow to the retail trade industry. While the shift in jobs from retail trade to transportation and warehousing is positive in terms of home affordability (retail trade workers earn 60 percent of the wage of transportation and trade workers), workers in the transportation and warehouse industry nonetheless face a home affordability challenge (see Table 1).
One positive trend is the rising share of professional and technical services jobs, driven by the use of technology in business, consumer spending, social interaction, and daily life (internet of things and use of voice-activated services like Alexa, Google). Professional and technical service workers accounted for 6.3 percent of the workforce in 2019, up from 5.1 percent in 2000, and they earn on average wages that will enable a single-earner household to afford a median -priced home (mortgage payment is 23 percent of income as show in Table 1).
State Employment Trend as of April 2019
Employment conditions remain broadly positive as of April 2019, boosting the demand for homes (among workers who can afford a home). In April 2019, net payroll employment increased by 2.6 million jobs from one year ago, an increase of 1.8 percent. Since December 2011, payroll employment has increased by at least 2 million annually. Compared to the level one year ago, nonfarm payroll employment increased in the District of Columbia and in all states led by Nevada (3.8%), Utah (3.2%), Arizona (2.8), Washington (2.7%), Texas (2.5%), Idaho (2.4%), South Dakota (2.4%), Florida (2.4%), West Virginia (2%), and South Carolina (1.9%).
View the April 2019 State Employment Monitor.
- NAR released a summary of pending home sales data showing that April’s pending home sales pace was down 1.5 percent last month and fell 2.0 percent from a year ago.
- Pending sales represent homes that have a signed contract to purchase on them but have yet to close. They tend to lead Existing-Home Sales data by 1 to 2 months.
- All of the four regions showed declines from a year ago with the Midwest having the biggest decline of 2.4 percent. The Northeast had a drop in sales of 2.1 percent followed by the South with a decline of 1.8 percent. The West experienced the smallest dip in contract signings of 1.5 percent.
- From last month, three of the four regions showed inclines in contract signings. The Midwest region had the only gain of 1.3 percent. The South had the biggest decline of 2.5 percent followed by the Northeast and West, both fell 1.8 percent.
- The U.S. pending home sales index level for the month was 104.3. March’s data was revised to 105.9.
- March’s incline brings the pending index back above the 100 level mark for the fourth consecutive month.
- The 100 level is based on a 2001 benchmark and is consistent with a healthy market and existing home sales above the 5 million mark.
There continues to be a price mismatch between homebuyers and sellers, according to REALTORS® who responded to NAR’s April 2019 REALTORS® Confidence Index Survey. In April 2019, REALTORS® reported that 48 percent of homebuyers were looking for a home at $250,000 or below. However, only 40 percent of the homes that sellers’ agents listed were priced at $250,000 or below. Among seller’s agents, the median list price was $307,200, which is $51,300 or 20 percent more than the median home buyer search price of $255,900
There continues to be a mismatch between demand for homes and the supply. Buyer’s agents reported on average taking nearly five client tours in April 2019, while seller’s agents on average reported listing three homes during the month. On average, a property that was sold in April 2019 had nearly three offers.
A small fraction of sellers provides incentives to assist buyers. In 2015, 26 percent of sellers offered incentives, with the share declining to 19 percent in 2018. In the first four months of 2019, 22 percent of sellers provided incentives to assist buyers, such as helping with closing costs (10%), offering a home warranty that can cover buyers for repairs/replacement such as for heating, cooling, plumbing, electrical, and major built-in appliance (9%), undertaking remodeling (3%), and other incentives (2%).
What This Means to REALTORS®: Buyers are still looking for homes with prices that are typically below what is offered on the market. Although it is still a sellers’ market, sellers can make the property more affordable for homebuyers (especially those on the high end) by providing incentives.
Amid sustained economic expansion and the lowest unemployment rate since 1953, commercial property prices are still broadly trending upwards although at a modest pace compared to past years, according to NAR’s 2019 Q1 Commercial Real Estate Trends and Outlook Report.
In the small market (less than $2.5 million deals), commercial property prices rose modestly by one percent from a year ago (seven percent in 2018 Q1). REALTORS® typically transact in the small market, with the average sales at $1.2 million in 2019 Q1. In the large market ($2.5 million and above deals), Real Capital Analytics reported that commercial sales price rose six percent nationally (nine percent in 2018 Q1). The National Council of Real Estate Investment Fiduciaries (NCREIF) Index and the Green Street Advisors Price Index also show a modest annual increase of two percent in 2019 Q2.
In both the large and small markets, the cap rates were slightly above six percent. Multi-family was the top-performing asset class in both the small and large market, with the lowest cap rates (which means high prices). Industrial properties were the second-best performing asset class in the large market, mainly for flex properties (essentially a combination of warehouse, office, showroom buildings). In the small market, hotels (likely Class B/C) were the next best performing asset.
According to REALTORS® who participate in the small market survey, cap rates in the small market continue to tend downward. One reason may be that demand is moving towards suburban areas where commercial properties are less expensive. According to Real Capital Analytics, commercial prices in non-metro areas rose at a faster pace in 2019 Q1 than prices in the six major metro areas of New York, Boston, Washington DC, Chicago, Los Angeles, and San Francisco: in March 2019, commercial prices were broadly up by six percent in non-major markets compared to 4.5 percent in the six major metro areas.
REALTORS® and commercial affiliate members reported a slight increase in vacancy rates in 2019 Q1 across all property types compared to the prior quarter. With vacancy rates slightly trending up, REALTORS® reported a slight decrease in leasing volume (-0.10%) and a modest increase in leasing rates (2.3%) in 2019 Q1 from the prior quarter.
Among property classes, vacancy rates were lowest in the multi-family market, at seven percent, followed by the industrial market, at eight percent. Retail and hotel properties had on average double-digit vacancy rates.
In 2019 Q1, the average tenant improvement allowances (per square foot) in the small market were $2 for multi-family units, $5 for industrial property, $17 for office, and $21 for retail.
Multi-family and industrial will continue to be strong commercial asset classes. The multi-family market is expected to remain bright in metros with low vacancy rates and affordable rents. E-commerce will continue to sustain demand for industrial properties, particularly flex properties. Retail brick and mortar will continue to do well in growing metros and in retail niches that require face-to-face customer service. The office market will be sustained by the growth in technology-driven jobs. The Opportunity Zone tax break on capital gains is expected to bolster commercial and residential real estate sales in 2019-2020.
 The small market makes up a smaller fraction of deal volume but accounts for a larger share of buildings: according to Energy Information Administration 2012 Commercial Buildings Energy Consumption Survey, buildings 10,000 square feet or less in size account were 72 percent of all commercial buildings; https://www.eia.gov/consumption/commercial/data/2012/bc/cfm/b23.php