Income Growth Remains a Challenge for Housing


One factor holding back a more robust recovery in housing is the decline in incomes for key prospective renting and home buying age groups. While job creation has been positive, if lackluster, sluggish growth or declines in incomes for those seeking to rent their first apartment or purchase their first home holds back housing demand. A significant amount of pent-up housing demand exists, but for it to be unlocked more rapidly, additional gains in wages must be realized.

As a way of gauging the robustness of the economy recovery, we were previously tracking household balance sheets. But recent data suggests that balance sheet recovery, promoted by rising home prices and other asset gains, has taken hold. These gains change the focus to incomes.

Household income typically follows a life-cycle pattern of growing with age, as skills and seniority grow, followed by later declines in earnings as retirement occurs. For example, consider the following graph of median income by various age classes (by head of household), using 2012 Census data from the Current Population Survey (CPS).

Real Incomes by Age

The data show the median incomes tend to peak at 45 through 54 years of age. This life-cycle of income is also a good illustration of why it is important to have an effective housing finance system. Because incomes tend to peak later in life, borrowing to buy a home enables younger households to make what is often the largest investment in their lives during the years when their household is likely expanding due to marriage and children.

However, incomes are not static. They change with macroeconomic conditions, and the Great Recession produced large impacts on average incomes with distinct effects on various age groups. The following chart reveals changes in real (inflation adjusted) incomes by age class using the year 2000 as a starting point. In general, all age classes have seen declines in incomes, with the exception of the 65 and older cohort. Since 2000, the largest reductions in income have been experienced by those under age 24, followed by people 45 to 54 (the top earning age group).

Index Income by Age

Focusing just on recent changes in income, the following graph (corrected after original post) uses the CPS data to track the medium-run (2007 to 2012) and short-run (2011 to 2012) changes in earnings by age group.

Real Incomes by Age



The red bars track the fallback in incomes due to the period of the Great Recession. In percentage terms, some of the largest declines were realized by key age groups in terms of housing demand: 25 to 34 year olds (9% decline) and 34 to 44 year olds (7.5% decline).

Furthermore, recent changes – the blue bars, for 2011 to 2012 – have proven positive for some age classes, while negative for others – particularly the young. For those under age 24, median incomes declined 1.6% on a year basis. Householders aged 25 to 34 saw a nearly 1% decline from 2011 to 2012.

Given the relative weakness of first-time home buyers in the market and the rise of issues like student loan debt (including rising delinquency rates), it is clear that income growth will be key metric for the future of new and existing home sales. Nonetheless, the future of home building and home sales is positive for 2014, but additional gains in median incomes for key housing demand classes will build on the recovery that has taken hold over the past two years.

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9 replies

  1. While falling income is a factor, I believe the single most important factor retarding a housing recovery is the nation’s current housing policy. This policy has priced FHA out of the market “in order to preserve it for future generations”. We have seen just how well the plan to save FHA has worked to date as the recent bailout has shown. The question is, what good will having FHA financing available to future generations do if current policy destroys the real estate market?


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