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CEO’s Corner: The Strange Forces Pulling Residential Real Estate

Don - CEO - HomeUnion - Real Estate Investing - Jobs and WagesJobs and Wages

 Sometimes a rising tide does not lift all boats, such is the case with the current forces impacting housing. Unemployment is stuck at 4.1 percent and only 8 percent when underemployed and discouraged workers are included. The average wage increase for private sector workers was 2.7 percent year over year, but only 2.4 percent for nonsupervisory workers. The last time unemployment was this low was in 2000, when wage growth was 4.3 percent. So, what’s keeping wages from expanding at historical levels? One major factor is that many people who were on the sidelines during the Great Recession are slowly making their way back to the workforce, giving employers more flexibility without raising wages. The Wall Street Journal recently profiled Elkhart, Indiana, which went from bust to boom on the back of RV manufacturing – an industry that relies on custom assembly and few robots. While the town is experiencing a labor shortage, homebuilders are not active and employed workers are saving more for a rainy day. Why? Because when you come out of a bust, you are nervous about the next one. Many workers share this sentiment. There is post-recession anxiety that doesn’t allow them to fully open their purse strings. Many are content to rent rather than spend their savings on a mortgage.

 Affordability

 Combine the relatively stagnant wage growth and the post-recession trauma with the housing affordability issue and you have gale force headwinds towards homeownership. We have a historic lack of inventory and skyrocketing prices in many regions. Consider San Francisco, where the median price of a home is around $1.2 million. We don’t need to do the heavy math to know that only a small section of wage earners can afford these homes. On the other hand, there is a lack of inventory in these expensive markets since many owners of higher priced homes are staying put in order to avoid the new cap in mortgage deductions and higher taxes. There are a large number of potential buyers on most deals, and several close above initial asking price. This dichotomy presents a new irony, those who can afford expensive homes are losing out to competition and would-be buyers of less-expensive homes are squirreling away their savings for a rainy day.

The tax cut has not impacted the middle class in a meaningful way, while the stock market roller coaster serves as a stark reminder that happy days could evaporate anytime. What’s worse is that most people have difficulty understanding the current basis for market volatility and why their net worth fluctuates on a whim. Investment real estate offers much greater stability than the market, though risks are present there as well. If you are buying what no one else is buying, you are a genius or a fool. Unfortunately, most families face everyday commitments that preclude them from becoming experts in any investment vehicle. Investing in residential properties needs more expertise than ever to achieve predictive outcomes. If you live in a high-priced area and want to own real estate as part of your portfolio, it may be time for you to look at other parts of the country, where your dollar will go further, and you will find stable renters who have no desire to transition in to homeownership. If we are in this situation in a booming economy, one can only envision the kind of caution a slowdown will bring to many people in the middle of the income curve.

 

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