The purchasing power gap in American housing

Transcript:

Allie Barefoot: Welcome back to Data in Context. I'm Allie Barefoot with Cotality. This episode is a part of a mini-series that we have right here on the channel where we take a deeper dive into Cotality's monthly Home Price Index report. While the headlines are mostly focused on the national price slowdown, Cotality analysts are noting another shift: the housing market might finally be entering a navigable phase. The frantic bidding wars of the past are slightly fading, giving buyers fresh leverage to negotiate on price and inspections. But this also means a reality check for sellers who may now need to realign their expectations with the economic drivers. So, it's a clear signal the market isn't just being dictated by mortgage rates anymore. The focus has shifted to purchasing power and the wage-to-price gap. So today, we're going to be talking with Cotality's Chief Economist, Dr. Selma Hepp, and she'll be breaking down these shifting power dynamics and what they could mean for your next move. Let's go on ahead and jump into today's questions with Selma. Selma, thank you so much for joining us again on Data in Context.

Dr. Selma Hepp: Thank you. Thanks, Allie, for having me back.

Allie Barefoot: Of course. We're just going to go on ahead and jump right into this because I know that there is a—almost a 1% growth rate that is essentially a flatline compared to the boom years of 2021 and 2022. And I can't believe it's already 2026. But you've called this a rebalancing phase. But is this as low as it goes, or should we expect prices to actually start to dip further as we move forward?

Dr. Selma Hepp: Yeah, that's a great question. It's probably on minds of many people. So, you know, so far over the course of last year, we saw a significant slowing in home price appreciation, and now we are at this 0.9%. And that is expected to continue to—into spring of 2026 and probably through middle of this year. And while we will be reaching very close to zero, we're not expecting to go below that. So home prices are not expected to decline on a year-over-year basis. In fact, we are expecting some pickup in latter part of 2026 in terms of year-over-year growth. But, you know, the other way to think about it is what's happening with the home price index itself. And essentially, over the course of last eight months, since spring of last year, home prices have been essentially flat, you know? And—and—and so when you start looking at this year-over-year change, that change becomes small and small, and hence it's approach—it's approaching 0%. But again, you know, we're not, you know—we will not see a lot of appreciation in the coming months, but it's also not going—expected to dip significantly below zero. You know, we might see some month-over-month changes that are very small, potentially negative. We did see that in also in latter part of 2025. But again, on this year-over-year basis that we most often look at when we talk about home price appreciation, it's not expected to dip below zero.

Allie Barefoot: And we've seen mortgage rates drop about 50 basis points since last summer, which you've noted is helping prices level off. Does this purchasing power gap, does it become a large threat to market liquidity more than the interest rates themselves?

Dr. Selma Hepp: Yeah, so it's very interesting and important actually to decouple what affordability is about, right? One thing we talked about, as you said, a lot was mortgage rates. There's also home price appreciation, but there's also incomes. And so we were obsessed over, you know, 6% to 7% mortgage rates and, you know, how much the decline in these mortgage rates is going to help affordability. But at the end of it, it's really, you know—first of all, we're not seeing a lot of dip. You know, 50 basis points is as far as we've gotten so far, and we're not expecting a much more dip than that into, say, mid-5s. But again, it's—it's ultimately really about purchasing power that's at the core of—of all of this. Because even if mortgage rates do drop to, say, 5.5%, the median home prices still require about 35% of household's income to purchase that home. And that, you know—that, you know, that with the slower home price appreciation and a faster wage growth, that is expected to contract—so more like not 35% of household income, but 30% of household income. But it's very, very slow and marginal, and that's keeping the market frozen at the moment. The other way to think about purchase power is, you know, how much people have to come up with in terms of down payment when they're buying a home. And this is really important for first-time home buyers. When we think about affordability 50 years ago, like in 1970s, you needed a 20% down—for 20% down payment, you needed about six months' worth of income, household income. Now, that number increased to 12 months in most, you know, most recent years, in 2025, 2026. So it takes much, much longer for people to save up for that down payment, and that's really the lock that, you know, that's being held on the market—what's keeping the housing market frozen at the moment in many ways.

Allie Barefoot: That makes total sense to me. You know, I'm actually in Gen Z, so I am a part of that first-time home buyer group. And a lot of the conversations that I have with my friends is the down payment. You know, it's not necessarily the listing price, but it's how much we have to be able to afford out of pocket right there at those closing costs. And I want to mention wage growth. You touched on that a little bit, kind of going hand-in-hand with the power purchase. And if rates stay around 6%, but wages continue to outpace those home prices, is that enough to trigger a spring recovery, or do we still need rates to drop further to kind of break that deadlock or unfreeze it?

Dr. Selma Hepp: You know, we've seen a significant decoupling between wages and home prices over the last couple of decades. And so yes, while, you know, slower rate of home price appreciation and faster pace of wage growth does bring that balance to something more historical, long-term, more affordable—it—that will take a long time. You know, to put things into perspective, historically, it cost about three times household income to buy a home. Now that ratio has gone over five times the income, and in some markets, it's as much as ten times the income. So, you know, the purchasing power here is really being constrained by the fact that home prices have gone up so much faster and so much more in many markets than—than the wages. So, you know, unlocking will take a while, and—and that's why, you know, when you look at the forecast for home prices—forecast for home sales activity—it's really going to take a really gradual—the normalization is going to be really, really gradual. It's going to take a while for us to catch up to wages. So for us to unlock the market, you know, we really need to see consistently stronger rate of wage growth than home prices for us to return to some normal level of—of, you know, home price-to-income ratio, and to really be able to spark the recovery in the housing market.

Allie Barefoot: Obviously, there are several factors that go into actually buying the home, and one of those is inventory. You know, I drive around and I do see a fair amount of "For Sale" signs popping up in neighborhoods, and you are noting that inventory is finally hitting 2019 levels in some areas. Yet sales are still a little bit low. Why is having more homes for sale not immediately resulting in people moving or buying houses at an absurd rate? Are we just waiting for a specific magic number in rates or wages to kind of break that deadlock?

Dr. Selma Hepp: Yeah, you know, that's a wonderful question because all we talked about throughout 2023 is the fact that we didn't have any inventory, and we—2023, 2024—we got into 2025 and we saw a surge in inventory, but no impact on—on home sales activity. And so this again goes back to this question of lack of affordability, purchase power, whatever we want to call it—wage-to-income ratios. People, you know—there may be more inventory now, but a lot of people cannot afford it. And most of the sellers are not necessarily willing to lower their—their expectations for the home purchase—home sales price they will get, and so they end up actually pulling their home off of—of market. And we saw a spike in those cancellations or—or de-listings, as we call them in the housing market. So sellers pulling inventory off—off the market. So yes, inventory is helping to slow the rate of home price appreciation, which is good, but unfortunately, home prices are still way too high for many people.

Allie Barefoot: It's unfortunate. There are so many beautiful houses hitting the market right now, but I guess you have to have a little give and a little go. But with the prices possibly flattening out, are we actually seeing investors pull back from the market, or does this navigable phase actually make it more attractive for them to jump back in and compete with home buyers? I know you've really been monitoring investor activity for the last couple of months.

Dr. Selma Hepp: Yeah, it's a very relevant question right now, too, given, you know, the administration's efforts to try to spur some—some supply from investors. But, you know, there are different types of investors. There are small mom-and-pop investors—a lot of times they could be also flippers, you know, they're looking for appreciation in the housing market to do some repairs and then they sell that home. When home price is slow, it makes it very difficult for them to flip that home. So we do see some segment of the investor activity pull out of the market when home price is slow. But on the other hand, you have these different types of investors that are more looking for stability, they are looking for a steady yield—meaning steady rate of return—whether that's in terms of the rental income that they get or just long-term investment in the housing market, so steady rate of appreciation over a longer-term period. So, you know, right now we still see elevated rates of investor activity in the housing market. And again, it's—it's some, you know—to some degree, it's a change in the type of investors; to some degree, it's also change in the markets that they're looking at, because some markets are continuing to see a lot of home price appreciation. There are also markets that have very limited inventory, and those inventories do need a lot of repair. So, you know, opportunities differ depending where you are in the—in the country.

Allie Barefoot: And finally, Selma, we're looking towards the spring buying season. We saw 77 metros decelerating last fall, according to the Home Price Index report, but that number dropped to 49 in December. Does this suggest that we've officially hit the floor for this cycle, or are we just kind of in a temporary lull before another shift for the second half of the year?

Dr. Selma Hepp: Yeah, so, you know, this drop in the number of markets that are seeing home price decline was a huge signal. You know, we were worried at some point that we are seeing a rapid increase in number—or spread of that contagion of home price declines, but that has now slowed. And so, in many ways, I do think we've hit a floor because we're not seeing that increase in number of housing markets posting declines. But I don't necessarily think that now we are on a rapid bounce back, you know? We will see, you know—as we—as we said, 2026 is going to be a year of slow recalibration. There's going to be a lot of markets where home prices are still trying to find their customer, right? Sellers are trying to find buyers, and what buyers can afford. So there is going to be some repricing, there's going to be some price drops, you know? But overall, I think that in terms of the spreading of this contagion, again, of decline in home prices across more and more markets, that's behind us.

Allie Barefoot: That makes total sense, and that's definitely something we can continue to monitor looking forward and obviously have more and more conversations about the monthly Cotality Home Price Index report. Selma, thank you so much again for joining us here, and I look forward to many more conversations as the year goes on.

Dr. Selma Hepp: Thank you, Allie. Thanks again for having me, and I look forward to more conversations, too.

Allie Barefoot: And thank you again to Dr. Selma Hepp for joining us here on Data in Context, and thank you guys so much for listening. If you haven't already, go on ahead, hit that subscribe button for me, and as always, if you want to find out more information, head on over to cotality.com.