We've always said that the factor that could have the most crippling effect on home values is Household Income.
Simply put: if home prices are rising, but household incomes are not, then there will come a time when the median household can no longer afford the median priced home. Depending on the rate of home price increases compared to household income increases, that could be really fast - like - this year.
The impact that this could have on the housing market cannot be understated. If buyers cannot afford homes and there are now new financial insturments that can "help" make them more affordable ("Stated Income", anyone), then home prices have to fall into the range where prices and incomes are in equilibrium.
This Year It's Different.
But this year marks the third-straight year that household incomes have increased, from having been flat- and even down in years prior.
Reports released in May show that median household income has climbed 3% since Trump took office - from $59,471 in January 2017 to $61,483 last month according to Sentier Research which tracks income on a monthly basis using census data.
Household income is at a 50-year high after adjusting for inflation, which is a sharp turnaround from Obama years.
Rates of Increase Must Match...
...in order for the market to avoid an ugly price correction. But thing are different during this home-value increase cycle, in that household incomes are also increasing nicely. If incomes can continue to increase nicely, then income-driven home price correction could be driven way out into the future. And it may never even happen - especially if home prices can come back down to more normal levels in a less abrupt fashion than before.
Balance is Key
The goal of the housing market should be for prices to increase in parallel with incomes. When this happens, we have a fundamentally-healthy housing market. With either of these grown likes get out of alignment, that's when the trouble starts.