This Week’s Economic Update, April 26, 2021

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There is growing concern about the aftermath of the current inflation in housing.  The market is currently sizzling like a griddle waiting for the pancake batter.  In virtually every market, values are rising, being pushed beyond listing prices with multiple offers being presented, in some cases before an official listing is even public.  The push is coming from a number of sources.  First, the Millennials are finally settling down, recognizing that they want a place of their own.  Their preference is a single family detached dwelling, not a condo or apartment any more.  Others no longer see the need to live in either the core downtown area of a city or even in the suburbs.  The pandemic changed the office setting which allows for more flexibility in a residence location.  No longer being required to commute every day opens up the possibility to move to smaller towns avoiding the pollution and growing crime issues that in the past year have inundated the inner cities.  The lack of affordable, buildable land has created a shortage of new construction projects until just recently.  The new construction numbers point to a trend that builders are now able to pass on the higher land costs to buyers who are becoming desperate to get the house they want.

We saw this during the early to mid 2000’s during the last housing bubble.  At that time the mortgage industry promoted overbuying and overpaying by offering esoteric financing options that eventually led to the crash in the market.  When the balloon mortgages matured or when the adjustable rate changed or the interest only period ended, millions fell into foreclosure.

While the risky loan offerings are not allowed, other ways of affording the purchase of a house at this time do exist.  These offerings are not quite the time bomb that was lurking 15 years ago, but they may have a play in what could potentially be a repeat of the housing crash.  Real estate market watchers are concerned that we could see a wave of foreclosures in 2023. 

Part of the issue is the current rise in home values.  Over the past year, values have risen, on average, 9.5%.  That is the most in one year in history and not sustainable.  Those states with a property tax are salivating at the thought of the increase in real estate tax revenue.  The first or second year after the purchase, with updated valuations, many homeowners will be shocked at the increase in the property tax payment.  Those marginal buyers who were already at the top of the debt to income ratio might find themselves unable to make ends meet, particularly if the school district and other taxing entities raise levies. 

On average the tax payment is 1.1% of the value of the property.  For the US this equates to about $3,720.  The State with the highest property tax rate is New Jersey, 2.2% with an average tax of $9,200.  Other states with high property taxes include Illinois, Texas, Vermont and Connecticut.  If a foreclosure crisis begins to arise in 2023, these states might be the bellwether indicator.

The recent wage reports are showing an increase across the board. In Economics we talk about wage push inflation.  As wages rise, prices are pushed up for two reasons. The first, is employers passing on the cost of the increased wages through price mark ups.  The second, is consumption due to more residual income soaking up the supply of goods.  This was originally a concern when advocates were promoting raising the minimum wage to $15.00 per hour.  We are finding out now that there is more than one way to push up wages, absent the approval of raising the minimum wage.

One of the reactions to the Pandemic was increasing and extending unemployment benefits.  The original addition of $600 per week to the unemployment benefit effectively raised the minimum wage across the board.  Many workers found that they could make more on unemployment while the higher benefits were being paid.  Lower skilled workers have been sidelined, waiting for the now extra $300 boost to expire.  Low skilled jobs that pay beneath $10 per hour go wanting as it is more profitable to wait until the unemployment benefits decline.  The only way many employers are going to find the workers needed is to boost the starting wage, and keep it there for some time.

Overall, the pandemic unemployment benefit program has left a legacy.  The program is raising the minimum wage employers are requiring to pay new employees as well as keeping the unemployment level stuck at a higher level than it should be.  Once the extended benefits expire it is unlikely that the employers will reduce the wages but rather will have to pass on the cost to the consumer. 

In essence the government just found a new way to raise the minimum wage without actually setting a wage level.

Have a great week.

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