Why it's getting even harder to keep a roof over your head

Why it’s getting even harder to keep a roof over your head

Rents have increased by double digit percentages in some cities. Meanwhile, buying a home is the most unaffordable since the mid-1980s. Mortgage rates have topped 6% and house prices remain just below record highs set in recent months, excluding many potential buyers of the market.

And while there are signs of a cooling in the market, there doesn’t seem to be much relief in sight for homebuyers.

A year ago, a buyer who staked 20% on a single-family home with a median price of $363,800 and financed the rest with a mortgage rate of 2.88% – the average at the time – had a monthly payment of $1,208.

Today, a homeowner buying the home at the median price, which is now $396,300, with a mortgage at the current average of 6.29% would pay $1,960 a month in principal and interest. That’s $752 more each month.
With inflation pushing up most household spending, few potential buyers can afford these more expensive monthly payments.

Over the past five years, the average home price has risen 60% while the average income has risen less than 15%, said Andy Walden, vice president of business research at Black Knight, a company mortgage databases.

“House prices lag significantly behind income levels,” Walden said.

Americans are now spending more than 35% of their median income on monthly principal and interest payments for that newly purchased home at the median price. Historically, Americans have spent nearly 25% of their median income on payments.

To get back to that level, Walden said, a combination of these things would have to happen: A person’s income would have to go up 40%, mortgage rates would have to be halved, or there would have to be a 30% drop in the median house price.

But none of these things are likely to happen any time soon.

How did we come here?

Part of the reason housing has become so expensive is that the record high mortgage rates seen during the Covid-19 pandemic have increased demand for homes, driving up prices. With multiple buyers competing for a limited number of homes for sale, bidding wars and cash bids have become common, driving prices to record highs.

Buyers today are grappling with a combination of high home prices and rising mortgage rates.

“The sore point came when rates returned to their 6% level,” Walden said.

The other side of the issue is supply. Impatient buyers faced a long-brewing nationwide home shortage, creating a supply-demand mismatch that sent home prices soaring.

The United States has fallen behind by about 5.5 million housing units over the past 20 years as builders failed to keep up with historical building trends, according to the National Association of Realtors . If you add the destruction of property due to demolition or natural disasters, among others, the total shortfall could be closer to 6.8 million during this period.
Should I rent or buy a house?

The unit deficit is so deep that it would take more than a decade to catch up, according to NAR.

But even if more houses and apartments are built, it won’t matter unless people can afford it.

In April 2021, a household needed to earn about $80,000 a year to pay payments on the median price home with a modest down payment of 3.5%. A year later, the required income was $108,000. This cost increase means that about 4 million renter households who could have bought the house at the median price last year could not do so twelve months later, according to the Joint Center for Housing Studies at Harvard University.
With no homes to buy, tenants are staying put, driving up rents even further in an already tight market.
Sun Belt cities, like Phoenix and Austin, have seen some of the biggest increases in housing costs during the pandemic. In Miami, home prices are up 33% from a year ago and rents are up 17% from a year ago, according to Realtor.com. But the affordability crisis is happening nationally, in every region of the country.
As renters reach the limit of what they can afford to pay each month, home ownership is becoming increasingly out of reach as they struggle to save for a down payment. This widens the wealth gap and locks in inequalities between those who benefit financially from home ownership and those who do not. It also widens the racial homeownership gap, in which 72% of white Americans are homeowners while only 43% of black Americans own a home, according to NAR.

So what happens next?

There are clear signs of cooling in the housing market. Home sales have fallen for seven straight months as rising costs of buying and financing a home push more people out of the housing market. Typically, as demand dries up, prices fall and mortgage rates eventually stabilize.

For now, however, mortgage rates are set to rise even further as the Federal Reserve continues to raise interest rates in its fight against inflation.

The Fed does not directly set the rate borrowers pay on mortgages. Instead, mortgage rates tend to follow the 10-year US Treasury yield. As investors anticipate Fed rate hikes, they often sell government bonds, driving up yield and with it mortgage rates.

How much house can I afford?

Most housing policy experts say building a steady supply of moderately priced new homes is necessary to solve the affordability crisis. But since these homes are not as profitable for builders as larger, more expensive homes, it will take a concerted effort from the public and private sectors.

In May, the Biden administration announced a housing supply action plan to close the affordability gap and lower housing costs. The plan aims to boost the supply of affordable housing by enhancing existing federal funding and encouraging areas to reform zoning and land use policies to build more housing at lower cost. It also calls on home builders to adopt more efficient building methods.

But none of these are silver bullets, and some of them require congressional action.

Separately, the Federal Housing Finance Administration, which oversees mortgage giants Fannie Mae and Freddie Mac, announced plans this summer to expand home financing options for buyers, especially those of color, to fill the gap. race between owners. These programs include down payment assistance, reduced mortgage insurance premiums and a credit reporting system that takes into account rental payment history.
Some of these ideas, including new no down payment loans with no closing costs for buyers in specific black or Hispanic neighborhoods, are already in place.

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