There’s Not One Real Estate Market Today, As There Are Thousands!

Rises in Interest Rates and Home Sales Generally Don’t Go Together, But They Do at Present. We Explore Why Today’s Crazy Real Estate Market Is Really Many, Many Markets.

Overview

In the U.S. today, we are used to seeing a lot of “red vs. blue” maps and charts these days. Anytime the subject is politics, we see the “red team” (the Republicans) represented in red and the “blue team” (the Democrats) represented in blue. Every time we see anything to do with elections or how Americans feel about almost any issue, from crime to inflation to well, ice cream, we are used to seeing very evenly divided maps and charts balanced between red and blue. Seemingly, everything is approximately “50/50” today in our polarized country!

And yet, not every red and blue map is balanced. Take a look at Figure 1 (Percent Change in Home Values from December 2022 to December 2023 in Every U.S. County). You see a LOT of blue, don’t you? The blue in this chart represents counties in the United States where the home prices went up last year (2023), while the red areas represent counties where home prices declined. So, what do you think the blue margin is, like a good 80/20 ratio? It certainly ain’t 50/50 anyway!

Figure 1: Percent Change in Home Values from December 2022 to December 2023 in Every U.S. County

Source: Chartr, “Home Prices Continued to Rise Across Most US Counties in 2023,” January 31, 2024 (Used with permission)

And this has been the story of the quite confounding — and expensive — housing market for the past year. Until just recently, interest rates have been on the rise, making housing less affordable as — do the math kids (and the equation is quite simple in whatever math you do — new or old) — every x% change in interest rates makes the mortgage on a house that will cost you y dollars will make your monthly payment go up by z dollars. This makes everyone in the home market look at paying more for the same house they would have before interest rates started to take off — perhaps much more, depending on when they started looking. As a result of all of this, fewer people chose to put their houses on the market (fearing what they would have to pay for their next home), and so the supply of available homes on the market in 2023 fell. And so we had a very weird phenomenon occur in the current real estate market, in that housing prices were actually on the rise in 2023 — to the tune of 3.2% year-over-year, according to Zillow, even as interest rates were on the rise and people found themselves able to qualify for and actually buy less house! Sometimes, the laws of supply and demand and the ‘Invisible Hand” of the economy do operate in mysterious ways, and the housing market of 2023 is certainly one of those instances.

Housing (Un)affordability

How all of this translates into housing affordability — or the lack thereof — is quite profound. While beyond the scope of this article, it is needless to say that the rise in home prices over the past decade has really put a pinch on family budgets. As you can see in Figure 2 (Necessary Income to Afford the Average Home Price Over the Past Decade), in 2023, the percentage of median income that it would take to make the monthly payment on the median-priced home has more than doubled in just over a decade — from 21.1% in 2022 to 41.4% in 2023!. In 2023, the bottom line is this for the “average” American: Say you make the median national income of $78,642. In order to buy the median-priced home in America, which stood at $408,806 last year, that means that you would be spending 41.4% of your earnings (or $32,557.79 annually — meaning a monthly payment of $2,713.15) on just your house note — and just the principal and interest portion of that note, with an average 6.73% mortgage rate in 2023! That, my friends, is what is making us “a nation of renters,” and even as new housing starts seem to be rebounding to help ease the housing crunch, rents continue to be at astronomical levels across much of America today!

Figure 2: Necessary Income to Afford the Average Home Price Over the Past Decade

Source: Redfin, “2023 Has Been The Least Affordable Year for Homebuying on Record — But 2024 Is Looking Up,” December 2023 (Used with permission)

And, of course, everything in real estate is relative to where you happen to be located in the country. As you can see below in Table 1 (Median Home Price and Percentage of Income Needed to Afford It in the Top 50 Metro Areas of the U.S. for 2023), the percentage of the median wage earner’s income that it would take to afford the median home in the area varies wildly. The highest home prices in the country are, of course, in California. San Francisco, California, had the highest median home price in all the land in 2023, clocking in at $1,444,700. At that price, it would take 85.40% of a worker’s median income just for the median house payment! The ratio was actually the highest in the Anaheim (Orange County), California, area, where it would take 88.3% of the median income of an individual to make the monthly payments if buying the median home in the area!

Table 1: Medium Home Price and Percentage of Income Needed to Afford It in the Top 50 Metro Areas of the U.S. for 2023

Anaheim, CA: $1,022,075 (88.30%)
San Francisco, CA: $1,444,700 (85.40%)
San Jose, CA: $1,433,625 (73.00%)
Los Angeles, CA: $844,500 (72.90%)
San Diego, CA: $843,450 (64.60%)
New York, NY: $684,750 (56.70%)
Seattle, WA: $765,760 (54.30%)
Miami, FL: $504,990 (54.10%)
Oakland, CA: $900,575 (53.30%)
Nassau County, NY: $614,355 (50.90%)
Riverside, CA: $544,375 (49.80%)
Boston, MA: $677,695 (49.30%)
West Palm Beach, FL: $458,807 (49.10%)
Sacramento, CA: $558,975 (47.50%)
Portland, OR: $537,783 (45.60%)
Fort Lauderdale, FL: $411,700 (44.10%)
Denver, CO: $574,500 (44.00%)
Las Vegas, NV: $409,237 (43.80%)
Newark, NJ: $516,500 (42.80%)
Nashville, TN: $440,981 (41.70%)
Orlando, FL: $395,722 (41.70%)
Tampa, FL: $371,024 (40.60%)
Phoenix, AZ: $440,266 (40.20%)
Providence, RI: $432,225 (40.10%)
Montgomery County, PA: $441,671 (39.80%)
New Brunswick, NJ: $479,854 (39.70%)
Dallas, TX: $420,845 (38.50%)
Charlotte, NC: $389,373 (38.20%)
Austin, TX: $456,950 (36.60%)
Jacksonville, FL: $358,481 (35.00%)
Atlanta, GA: $382,673 (34.20%)
Washington, DC: $530,375 (34.20%)
San Antonio, TX: $314,048 (33.70%)
Houston, TX: $331,251 (33.50%)
Virginia Beach, VA: $329,340 (33.50%)
Fort Worth, TX : $355,359 (32.50%)
Columbus, OH: $321,500 (32.20%)
Milwaukee, WI : $299,300 (32.00%)
Kansas City, MO: $309,900 (31.20%)
Warren, MI: $286,465 (30.50%)
Minneapolis, MN: $366,350 (30.40%)
Baltimore, MD: $358,335 (30.00%)
Chicago, IL: $318,578 (29.10%)
Indianapolis, IN: $290,462 (29.00%)
Cincinnati, OH : $270,280 (27.30%)
St. Louis, MO: $247,852 (25.20%)
Philadelphia, PA: $265,100 (23.90%)
Cleveland, OH: $204,773 (23.80%)
Pittsburgh, PA: $218,973 (23.50%)
Detroit, MI: $74,971 (18.50%)

Source Data: Redfin, “2023 Has Been The Least Affordable Year for Homebuying on Record — But 2024 Is Looking Up,” December 2023 (Used with permission)

Analysis: Location, Location, Location!

The age-old axiom in real estate is that everything comes down to one critical variable: Location, location, and yes, location! That has never been more true than today! Where you are located makes a huge difference in how affordable housing will be for you, whether you are looking to purchase a home or if you are a renter. Everything in terms of housing costs is driven by local housing prices, and as we have seen, if the market that you reside in or are relocating to has high housing prices, then you are going to have high housing expenses, period, full stop! There’s simply no way of avoiding the high cost of simply living if you find yourself in certain areas of the country, like California and New York. However, that has been the case for years.

What is different today can be seen in that map in Figure 1, in that the housing market is not a single market today, even though we talk about median national prices. As the folks at the analyst firm Chartr put it bluntly: “National price statistics tell only one part of the story, as the U.S. isn’t just one market: it’s thousands.” And it’s not just the more than three thousand counties that span across America; every market in the country has different cities and different neighborhoods within them. Together, these form ten thousand — perhaps really tens of thousands — of distinct real estate markets! How prices behave in these individualized markets — even micro-markets — can vary widely within a given region, a given metropolitan area, and even within a city and even neighborhoods within it. Every city of any size — and even some that aren’t has areas that have high desirability, while others unfortunately lag behind. As such, even the median home price in as narrow a band as a single zip code can vary a great deal, perhaps by 100 or even 200% — positively or negatively — depending on the specific home location.

And so the point of all of this is that everything does gravitate towards the median, but the median does not mean that home prices where you want to live specifically — even in a small geographic area — will necessarily be close to the national or even a regional median price for a house. More and more, we need to think granularly about real estate prices and about housing issues. And yes, as individual home buyers and investors, that may mean having to look for the bargains a little away — be that a few streets, a few miles, or a few cities over from where you really wanted to look for a home!

Finally, the lowering of interest rates nationally should bring buyers back into the housing market — and that is indeed good news — especially for real estate agents. But yes, the age-old laws of supply and demand will mean that this will only likely cause a rise in housing prices, even as Americans seem “stretched to the limits” in terms of overall housing costs as part of their personal incomes. So, the national debate over housing affordability is something that really needs to be addressed. It is certainly a topic worthy of discussion by candidates — even Presidential candidates — in all of the 2024 elections — and beyond!

About David Wyld

David C. Wyld is a Professor of Strategic Management at Southeastern Louisiana University in Hammond, Louisiana. He is a management consultant, researcher/writer, publisher, executive educator, and experienced expert witness. You can view all of his work at https://authory.com/DavidWyld. You can subscribe to his Medium article feed at https://davidwyld.medium.com/subscribe.

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