Wages Outpace Home Prices, Improving Housing Affordability

Housing affordability is showing signs of improvement as wage growth has begun to outpace the appreciation of home prices. This trend is a positive indicator for the housing market, suggesting a shift from a "savagely unhealthy" state to a healthier one, according to analysis of recent market data. While existing home sales data released this week indicated slight year-over-year growth and record-high home prices, the underlying economic dynamics point towards increased affordability.

Historically, home prices have shown consistent growth, with significant declines being rare since 1942. However, the key factor for affordability lies in the comparison between home price growth, inflation, and wage growth. In years where wage growth exceeds both inflation and home price appreciation, affordability improves over time. For instance, if home prices rise by 1% while wages increase by 3.5% and inflation by 3%, this scenario benefits long-term affordability. The current year's data, where home price growth is running below inflation and wage growth, suggests that price increases are relatively soft.

This year's performance is aligning with or even exceeding some forecasts for home price moderation. One prediction for 2025 anticipated a 1.77% increase in home prices, with the year ending at 1.3%. Despite home prices performing slightly better than a forecast of -0.62% for the current year, wages continue to rise at a faster rate. These developments are viewed as positive signals for the housing market's overall health.

Regarding housing inventory, while it has decreased month-to-month and has not yet returned to historical normal levels, current inventory is not considered critically low. Data from the National Association of Realtors (NAR) suggests that inventory levels are within a range that does not warrant descriptions of scarcity. A general rule of thumb indicates that inventory levels between 1.52 million and 1.93 million units are not indicative of a severely undersupplied market.