Do wages affect housing prices?

Continuing with the outlook of housing prices the next 12 months, I thought to myself, “Do wages play any role in housing prices?”.

To put it simply, wages do not, as a matter of fact, wages are minimally affected by high unemployment rates. How are wages & home prices linked? Affordability of payments. Currently, the average home in America is $420k with an average interest rate of 6.875%. Not including taxes, this results in an average payment of $2,200 if you are able to make the 20% downpayment. Average hourly income is $35.4 equating to $73,632 per year. Not including any additional expenses with your home, just P&I is 36% of someones monthly earnings.

But how does this compare to years past? Simply put, high. Looking back at 2008 recession, the highest ratio was in Q1 2007 which was 35%. Virtually the same number. Scary isn’t it? Not so fast. Currently average hourly earnings are up 4% year over year, meanwhile housing prices are down ~5%. This leads to a few questions:

Will wages continue to go up? (Monitor stock sentiment & projections)

Will real estate continue to go down?(Monitor interest rates & current days to contract)

Overall, will real estate stay stagnant until wages catch up? Only time will tell.