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

Americans looking to buy or rent a home have had a rough year.

Rents have risen by double-digit percentages in some cities. Meanwhile, buying a home is as affordable as it has been since the mid-1980s. Mortgage rates have topped 6% and home prices are off their highs of recent months, putting many prospective home buyers out of the market.

And while there are some signs of a cooling in the market, it doesn’t look like there will be much relief for homebuyers.

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

Today, a homeowner buying the median home price of $396,300 today with an average mortgage of 6.29% would pay $1,960 a month in principal and interest. That’s an extra $752 per month.

Since inflation drives up most household expenses, few prospective homebuyers can afford these higher monthly payments.

Over the past five years, the median home price has risen 60 percent, while median incomes have risen less than 15 percent, said Andy Walden, vice president of business research at mortgage database Black Knight.

“Home prices diverge significantly with income levels,” Walden said.

Americans spend more than 35% of their income on monthly principal and interest payments on the average price of a newly purchased home. Historically, Americans spent closer to 25% of their median income on payments.

To get back to that level, Walden said, some combination of those things would have to happen: a person’s income would have to increase by 40%, mortgage rates would have to be cut in half, or 30%. decrease in the median price of a home.

But none of these things will happen anytime soon.

Part of the reason housing has become so expensive is that the low mortgage rates seen during the Covid-19 pandemic increased the demand for housing, which pushed prices up. With multiple buyers vying for a limited pool of homes for sale, bidding wars and cash offers became commonplace, driving prices to record highs.

Now buyers are facing a combination of high home prices and rising mortgage rates.

“The pain point came when rates went back to the 6% level,” Walden said.

The other side of the issue is supply. Eager buyers ran into a longstanding national housing shortage, creating a supply and demand imbalance that has driven home prices higher.

The U.S. has lost about 5.5 million homes over the past 20 years because builders failed to keep up with historic building trends, according to the National Association of Realtors. If you add the destruction of property due to demolitions or natural disasters, among others, the total shortfall can approach 6.8 million during that time.

The shortage of units 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.

As of April 2021, a household needed to earn about $80,000 a year to be able to afford the median home price payments with a modest 3.5% down payment. A year later, the revenue was $108,000. That cost increase means that about 4 million renters who could afford a median-priced home last year can no longer do so twelve months later, according to Harvard University’s Joint Center for Housing Studies.

With no homes to buy, rents remain the same, pushing rents even higher in an already tight market.

Sun Belt cities like Phoenix and Austin saw some of the biggest increases in housing costs during the pandemic. In Miami, the price of a home is up 33% from a year ago, and rents are up 17% from last year, according to Realtor.com. But the affordability crisis is happening nationally, in every region of the country.

As tenants reach the limit of what they can pay each month, homeownership becomes more out of reach as they struggle to make ends meet. This widens the wealth gap and closes the gap between those who have the economic benefit of home ownership and those who do not. It also widens the racial home ownership gap, in which 72 percent of white Americans are homeowners and only 43 percent of black Americans own a home, according to the NAR.

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

For now, however, mortgage rates are likely to rise even further as the Federal Reserve continues to raise interest rates in a fight to combat inflation.

The Fed does not directly set the rate borrowers pay on their mortgages. Instead, mortgage rates tend to track the 10-year US Treasury yield. As investors anticipate rate hikes by the Fed, they often sell government bonds, which sends yields higher and, with it, mortgage rates.

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

In May, the Biden administration announced a Housing Action Plan to close the affordability gap and ease housing costs. The plan aims to increase the supply of affordable housing by enhancing existing federal funding and encouraging areas to reform zoning and land use policies to build more lower-cost housing. It also requires home builders to adopt more efficient construction methods.

But this is not a quick fix, and some of it requires 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 people of color, to close the racial home ownership gap. These programs include down payment assistance, lower mortgage insurance premiums, and a credit reporting system that takes into account rental payment history.

Some of those ideas, including new zero-down-payment loans with no closing costs for buyers in specific black or Hispanic neighborhoods, are already underway.