A new record for home prices—but fewer owners to benefit

The housing bust is officially over, 10 years after it started. But like much else in the economy, the real-estate recovery has benefitted the wealthy more than others, with many ordinary folks still falling behind.
A prominent gauge of home prices, the S&P Corelogic Case-Shiller index, set a new record high in September, surpassing the previous high, from July 2006. Home prices on average have risen 5.5% during the last 12 months. “This indicates a completed recovery of US home prices since the Great Recession,” S&P Global said in a release. Here’s the home price index since 1988, with the solid line representing the national average:

Great news, right? Well, sure, if you’re a homeowner enjoying an ongoing boost in wealth. But the portion of Americans owning a home has been dropping since 2005, with the homeownership rate now at levels of the mid-1960s. In late 2004, the homeownership rate peaked at 69.2% of all households. Today, it’s just 63.5%.
The homeownership rate went too high during the housing boom, fueled by gimmicky mortgages, bogus underwriting standards and bad purchase decisions by consumers. But it may have overshot to the low side as millions endured foreclosure and banks severely tightened lending standards.

Though healthier now, the housing market is still uneven, with more buyers locked out than in the past. The biggest price gains have occurred among the priciest homes, and mostly in the west and south, where the economy is growing faster than much of the rest of the country. Research from Trulia shows that just 7 cities—Dallas-Fort Worth, Houston, Denver, Nashville, Pittsburgh, Tulsa, and San Francisco—have enjoyed full price recovery in all segments since 2006, when adjusted for inflation. In every other market, some segment of the housing market remains below the prior peak, in real terms.
Housing affordability peaked in 2012, thanks to a combination of low interest rates and relatively low prices. Back then, the mortgage payment on a median-priced home took about 12% of the median national income. But there was a catch: Tight lending standards meant many consumers with middling credit couldn’t qualify for a loan.
Lenders have loosened up a bit since then, but affordability has worsened as prices have rebounded, with a typical mortgage payment now costing about 15% of income. And that will likely rise into 2017, since interest rates have been going up since Donald Trump was elected president. There’s also a shortage of starter homes in many markets, since gun-shy builders burned during the bust are cautious about committing to new projects. And since they make bigger profits on costlier homes, that’s where builders tend to focus.
With the economy continuing to heal, more people are likely to qualify for a mortgage and feel comfortable committing to such a big purchase. But the housing market may never go back to the way it was 10 or 15 years ago. Like a lot of other things.
Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman.