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Checking In On The Health Of U.S. Housing

Last week we received a number of important reports on the housing market here in the United States. Rather than looking at them all on a standalone basis, breaking them down together while looking at long term demographic and economic trends in the U.S. can provide some decent clarity on the current state of housing in this country.

The first report to note was new home sales, released Wednesday, which came in stronger than expectations, rising by 5.3% on a year over year basis. New home sales currently account for roughly 9.1% of the housing market. Overall, new home sales are a more important factor when considering housing growth in GDP calculations because a lot more goes into the build of a brand new house than a purchase of an existing home.

When you delve into the longer term trends, the report seems to illustrate the buyers of new homes are focusing on luxury. According to the Wall Street Journal, for the first time builders have sold more homes priced above $400K than those below $200K. Buyers seem to continuously be wealthier individuals. At some point, the lack of housing affordability for middle class workers who continue to struggle to get by will become more of an issue in the U.S.

Earlier in the week, the Case-Shiller Home Price Index was released and showed that home prices in the 20 city index rose by 4.5% from the same period a year ago. This is positive, but it is down from the double digit growth pace last year. There are two major trends at play here. First, the strong U.S. dollar has put a dent in affordability of U.S. real estate being purchased by foreigners. Foreign demand for U.S. housing has been strong in recent years, but throughout 2014 we saw demand for existing homes from non-resident foreigners steadily drop as the dollar strengthened.

The second factor at hand is that domestic demand did not pick up the slack when foreign buyers slowed. The problem here is that home price appreciation is growing at a faster rate than wage growth. Wages are currently rising by roughly 2.2% on a year over year basis according to the most recent jobs report. Home prices are rising faster than wages which makes it difficult for the average citizen to keep pace with affordability. Interest rates remain low which does help and is a factor that must be considered in affordability. On a larger scale, wage growth will need to accelerate for domestic housing demand to push prices to new levels.