The rising price of real estate coupled with increasing mortgage rates plus high demand is causing a major housing affordability crisis. It’s not helping matters that since the turn of the century, there has been a net underproduction of homes to the tune of nearly 2 million. These factors have led to the housing affordability gap widening faster than at any point in the last 25 years.
People buying homes today have no choice but to stretch their budget in order to purchase the real estate they want. The median cost for a home in the United States has now reached $250,000 and average mortgage payments have increased 5% in the first 3 months of the year based on this median-priced home. It is predicted that nationally, mortgage repayments could go up by another 15% by years end.
Studies have also shown that house prices are increasing faster than people’s income levels. A study from the Brookings Institution last year, showed that the top 20% of earners have seen their income rise by 24% since 1979. However, the bottom 20% have suffered a decline in the value of their earnings over that period. With the middle 20% of earners only seeing wages improve by 3.5% you can get an understanding of the problems facing the majority of home buyers.
Shortage of Homes
With the shortage of supply in housing, buyers are being hit hard. Less housing supply naturally pushes up the prices asked, which is leading to buyers taking on greater amounts of debt to complete the purchase. This fact is highlighted by the large increase in mortgage borrowers that have to pay more than 45% of their income to service this debt. The numbers of people falling into this category tripled towards the end of last year. Now, some of this was due to Fannie Mae raising the debt-to-income threshold, but it isn’t all down to that.
Where there were once affordable housing in less well-liked parts of cities, these have now frequently been subject to gentrification. This gentrification may improve the area, but it will, of course, remove more affordability from the market.
The situation isn’t the same all over the country, however. Many different factors contribute to the value of the local housing market with some areas being clearly overvalued. It is easy for buyers in these overvalued markets to think the prices will continue to rise at the same levels, this isn’t normally the case though and things will slow down.
A Slow Down in the Market?
Only a decade has passed since house prices crashed, but now they are almost back to their pre-crash peak. Builders still aren’t creating homes as fast as they are needed and with the economy being strong the demand is still outstripping inventory.
Now, it may not be quite a crisis yet, but as a greater proportion of people’s income goes on housing, the less money they will have to spend on other things. This has the potential to do some damage to the economy if allowed to continue out of control.
The housing market looks set to appreciate for the rest of the year, with no relief for house buyers. This situation can’t continue indefinitely, however, at some point there will be a slow down as more and more people find themselves unable to afford to move.