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There Are Two Housing Markets in America

12:00 AM, May 10, 2014 • By IRWIN M. STELZER
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So let me augment data with anecdotes gleaned from brokers, builders, and the trade press in hope of laying out a reasonable set of conclusions. The housing market has definitely cooled since interest rates rose by about one percentage point last year, to 4.4 percent, and prices by about 10 percent. For the average house that raises monthly mortgage payments from $934 to $1,162, or by almost a hefty 25 percent, on the typical 30-year mortgage, and increases the usual 20 percent down payment by $6,000. Although that won’t directly affect buyers who can pay cash and now constitute about 43 percent of all purchasers (other estimates vary), twice the portion of all buyers in the first quarter of 2013, it will affect others, reducing the number of serious house hunters.

Unless, of course, wages start to rise to prevent a further decrease in affordability. The Fed, increasingly worried about the housing market, believes that no such boost to demand is in sight since slack in the labor market will prevent such an increase, but its academic critics disagree. They say that not all unemployed workers and stay-at-homes are likely to re-enter the work force as the economy grows, meaning that competition for workers and hence wages will rise rapidly once growth accelerates.

Such wage increases are already hitting home builders, who complain that shortages of skilled labor are forcing them to raise wages to and often above boom-time levels. They are not confident they can pass further cost increases on in higher prices to buyers suffering from sticker shock, and are moving resources higher up the price and margin chain by including amenities such as wildly popular granite counter tops. That makes things even tougher for first-time buyers.

That means house prices are likely to continue rising, although not at the 11-13 percent rate of the past year. At the very top of the market, American all-cash buyers will continue to compete for trophy homes, and rich foreigners will continue to seek luxurious bolt-holes. At the starter end, the departure of investors buying-to-let should ease price pressures, perhaps even offsetting the passed-on cost increases, while banks’ desire to bolster their sagging profits might make credit a tad easier for first-time buyers. In the broad middle of the market, sticker shock should ease—interest rates remain low by historic standards—and buyer confidence rise as the economy continues to plod ahead. No big boom, but no sound of a bubble bursting either. 

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