&l;p&g;&l;img class=&q;dam-image getty size-large wp-image-941248294&q; src=&q;https://specials-images.forbesimg.com/dam/imageserve/941248294/960×0.jpg?fit=scale&q; data-height=&q;640&q; data-width=&q;960&q;&g; WASHINGTON, DC-MARCH 28: View of the City from the Roof of Chapman Stables on March 28, 2018 in Washington DC. (Photo by Benjamin C. Tankersley/For The Washington Post via Getty Images)
The real-estate market is a very important part of the economy and after a nice recovery there are a few cracks forming on the periphery. The real-estate market has been steadily recovering since late 2011. Back then, a slew of housing stocks and home prices bottomed and began turning higher after the prices collapsed during the 2008 financial crisis. Now, after a big multi-year rally, there seems to be trouble brewing in the U.S. residential and commercial real estate markets.
&l;strong&g;Commercial Prices Are Falling For The First Time In Years: &l;/strong&g;
For the first time in years, commercial real estate prices are falling which is not a healthy sign for Main Street or Wall Street. Many people look at commercial real estate as a leading indicator because it serves as a proxy for the overall economy. To extrapolate that logic, residential housing prices tend to rally when the economy is strong and businesses are hiring. So the fact that commercial real-estate prices are falling does not bode well for the economy or the residential housing market.
Another disconcerting factor that is plaguing the housing market is a concept known as stalled mobility. Steven Gattuso, CFA, CFP, CMA, Senior Portfolio Manager and Director of Research at Courier Capital, with $1.6 billion under management was the first person to bring this to my attention. Steven defines stalled mobility as, &q;The lack of ability for people to either move up in their housing, downsize or even make a career move to another city.&q; Basically, people want to move but there are a few factors that are preventing them from doing so. Here are a few of those factors:
&l;strong&g;Lack of Supply&l;/strong&g;:
The lack of supply is creating a situation where prices are being bid up. The Case Shiller Index is up over 6.0% in March and has averaged over 5.0% on a real basis for the last six years. This annual price increase is causing a big affordability gap. Put simply, housing prices are growing faster than wages and that is creating an affordability problem in the U.S. Unfortunately, this has hit younger families particularly hard as they are having a hard time buying a new home because prices are not affordable.
&l;strong&g;People Are Still Under-Water:&l;/strong&g;
According to S&a;amp;P the current supply of available homes is 3.4 months, which is lower than the 6.0 reading in a normal market. In addition, the home vacancy rate is 1.6% compared to a recent average of 2.1%. Steven told me, &q;Basically, no one is moving.&q; There could be a few factors involved in this as well. First, many people are still underwater because not every market has fully recovered from the losses of 2008. That means people cannot afford to sell their house, even if they wanted to. Moreover, many people have refinanced their homes during this period of low interest rates. Families who have a sub 4.0% mortgage may be reluctant to buy a bigger home at inflated prices and financing that with mortgages above 4.0%.
&l;strong&g;Entry Level Buyers Can&s;t Afford To Buy:&l;/strong&g;
The stalled mobility notion also impacts entry level buyers. At a certain point, when prices rise, entry level buyers can&s;t afford to enter the market. In turn, a lack of affordability prevents movement and increases supply. These two factors could cause prices to decline because sellers who are priced too high will receive fewer offers and eventually be forced to lower prices.
According to the National Association of Homebuilders the average price per square foot in approximately $150. This makes even a 1,500 square foot home $225,000. This is due to the availability and price of land coupled with increase in building materials and labor shortage. Materials, such as lumber, have increased significantly lately caused by wildfires and tariffs on Canadian lumber. Also, many workers in the industry left after the slowdown in 2008. Lastly the hurricanes in Texas and Florida, floods in other parts of the country and wildfires in California have taken a chunk out of existing inventory out of the market as well.
&l;strong&g;What Does All This Mean?&l;/strong&g;
The average median home price to median income hovered around 3.0 in 2003. Currently, with the median home price approximately $245,000 and the median income around $59,000 that ratio is now closer to 4.0 indicating that affordability is becoming an issue and right in time for rising interest rates.&l;/p&g;