Neil Irwin, senior economic correspondent with the New York Times and author of The Alchemist, told The Upshot, “This should be good times for the housing market with the economy booming, more people working for higher pay and the sizable millennial demographic reaching home buying age but, the market has gone soft and is being a drag on the overall economy instead of being a positive force propelling it forward.”

Residential investment drained GDP growth in each of the first three quarters of 2018. New home sales dropped -22% in September 2018 from its high in November 2017. Existing home sales dropped -10% during this same period.

Most people (including renters) are choosing to renovate homes/apartments rather than choosing to buy or move up. Look at the demographics:

  • Millennials – 66% choosing to renovate
  • Gen Xers – 73% choosing to renovate
  • Boomers – 87% choosing to renovate
  • All – 76% choosing to renovate and 63% having no plans to sell.

Nationally, per capita personal incomes have increased +25% since the end of 2011. The S&P CoreLogic Case Shiller National Home Price Index tells use that home prices have increased +45% since the end of 2011.

The gap between personal income growth and home price growth is larger in large coastal cities with high wages and booming job markets. (These large coastal cities also have legal and regulatory barriers that make it harder for builders to add to housing supplies.)

  • Per capita personal income growth in San Francisco’s metro rose +40% from 2011-2017 and home prices rose +96%.
  • Similar patterns exist in Los Angeles, Seattle, Boston, New York and Washington DC.
  • In Minneapolis, incomes have risen +22% and home prices have risen +46%.

Simply put, home prices are out of reach relative to incomes. Add more rigorous lending standards and rising interest rates and “…Buyers can only stomach so many price increases until it gets unsustainable, said Daryl Fairweather, the chief economist with Redfin. “Prices have reached a breaking point where buyers are fed up and have started to consider other options…” options such as renting, renovating and moving away from expensive coastal cities.

In the meanwhile, could the softening of the housing market for a few months or years or the standoffs between buyers and sellers over home prices give personal incomes a chance to catch up with a market that got a bit ahead of itself?

Robert Dietz, chief economist with the National Association of REALTORS® said, yes. “I think income growth will help us get out of this period. We’re probably looking at a period where existing sales volumes will be flat to declining and it now looks like 2017 was the peak of transaction volume.”