How an Unaffordable Housing Market Leaves the Next Generation Out in the Cold

Over the past several years, the housing market has been rattled by the COVID-19 pandemic, inflation, skyrocketing mortgage rates and supply challenges. It all adds up to a housing affordability crisis, which has become a central concern for communities and policymakers across the US. 

“For millions of families, the dream of owning a home is just that — a dream that it seems will never see the light of day,” Mortgage Bankers Association Chair Mark Jones said during a housing convention in October. “In the current crisis environment, this hope for a home has fallen even further.” 

Homeownership is widely acknowledged as the key to financial security and a strategy for building long-term wealth. The average net wealth of homeowners is 400% higher than those who rent, according to the Federal Reserve. Home equity, the value of ownership stake in your home, is an asset that represents the largest proportion of wealth for US households. 

But in 2023, home affordability hit its lowest point in nearly 40 years. How did we get here? And how will this impact future generations? 

The housing affordability crisis means it’s taking longer for people to become homeowners — and that’s especially impacting millennials and Gen Zers, economically disadvantaged families, and minority groups. There’s not one single driver of the crisis, but several colliding elements that put homeownership out of reach: rising home prices, high mortgage interest rates and limited housing supply. That’s on top of myriad financial challenges, including sluggish wage growth and increasing student loan and credit card debt among middle-income and low-income Americans. 

We spoke to experts and analyzed historical data to examine how the housing affordability crisis could change how Americans build wealth.

How do we measure housing affordability?

There are a few different ways to measure housing affordability. 

For instance, the National Association of Realtors’ housing affordability index looks at median income, interest rates and average home prices to determine whether the average family earns enough money to qualify for a mortgage on a median-priced home. An index above 100 signifies affordability for the average family: The latest quarterly HAI from the NAR shows an index of 61.9 for first-time buyers. 

Another way to think about affordability is how much of your gross monthly income goes toward housing costs. A general rule of thumb is that no more than 30% should be spent on rent or mortgage payments. But in today’s market, housing costs are by far the largest expenditure for families, with millions paying well above 30% of their monthly income for housing. 

It now takes 40.6% of the median household income to meet the principal and interest payments on a mortgage. That’s the lowest affordability level since 1984, according to data from Black Knight.

Home prices have increased exponentially 

Home prices, for the most part, gradually increase over time. Historically speaking, an average annual appreciation rate of anywhere between 1% and 5% is considered normal. But since 2000, home prices have seen two distinct surges: one during the run-up to the 2007 financial crisis and the second during the COVID-19 pandemic.

Note: The appreciation rate is separate from home price growth, though the two are interrelated. The median home price is a middle value based on all property values in a given area. The appreciation rate refers to the average annual increase in the value of an individual home.

Between 2020 and 2022, the median home price in the US increased by more than 40%. In 2021, the annual appreciation rate was roughly 18%. In 2023, home price growth and appreciation have slowed, but experts don’t expect prices to come down significantly anytime soon.

The rapid rise in home prices over the last two decades demonstrates why homeownership has become such an effective means of wealth building, according to Jason Sorens, an economist at the American Institute for Economic Research. But while rising home values benefit existing homeowners, they also push homeownership out of reach for many Americans.

Housing costs have outpaced wage growth

Another factor making housing unaffordable is that home prices have increased at a significantly faster clip than incomes over the past two decades. Today’s average real wage (adjusted for inflation) has about the same purchasing power it did 40 years ago.

In 2022, the median family income was $97,750, compared with $81,520 in 2000, which is an increase of roughly 20%. Compare that with the increase in home prices — around 160% — for the same period. 

According to Redfin, homebuyers in August 2023 needed to earn $114,627 to afford the median-priced US home, a 15% jump from one year prior and a 50% increase from the start of the pandemic. Meanwhile, wages were up by only 5.2% in November 2023 from the previous year. This means the average earner is unable to save enough money to buy a house based on their income alone. 

Home prices also vary greatly depending on location. To afford the monthly mortgage payments in markets where the typical home is more expensive than the US median, annual income needs to be much higher. The cost of homeownership in high-demand metro areas, like New York, is significantly more than in many rural areas, forcing out many lower-income individuals.

For example, in San Francisco, where the median home price is around $1.5 million, a household would need an annual income of over $400,000 to afford the steep monthly payments of $10,700.

Mortgage rates have doubled since 2022

Since March 2022, mortgage rates have increased dramatically in response to high inflation and the Federal Reserve’s efforts to slow price growth by hiking interest rates. 

Historically speaking, mortgage rates around 7% aren’t all that high (they were above 18% during the 1980s). But compared with the record lows of recent years, today’s rates are the highest younger generations have ever seen.

When the average rate for a 30-year fixed mortgage shot above 8% earlier this fall, the average monthly mortgage payment increased to more than $2,500 for the first time in history, according to Black Knight. And while mortgage rates are now closer to 7%, that’s still far too high for most households.  

Even though rent prices have also peaked in the last several years, it’s now cheaper to rent than to buy in much of the country, according to Zillow. For several years before the pandemic, those who were able to afford the upfront costs of purchasing a house had a much more affordable monthly bill than renters. But since the pandemic, rents have increased 29.4%, while the monthly costs for a single-family home have increased by 35.7% over the same period.

There aren’t enough houses

Higher mortgage rates also have a major impact on the housing market writ large, affecting current sales, inventory and home values. 

“High rates have created a lock-in effect where sellers do not want to sell and give up their low-rate mortgages,” said Aleksandar Tomic, associate dean for Strategy, Innovation and Technology at Boston College. Very few homeowners are willing to move since they would be stuck with elevated mortgage rates and high prices for whatever existing supply there is. That lack of active home listings keeps an upward pressure on home prices in many markets.

Housing inventory levels generally fluctuate throughout the year, particularly around popular homebuying seasons like the spring and summer. But overall, the number of active for-sale listings across the US in late November was still around half what it was in mid-2016. 

“In the past, a lot of people would sell their existing homes and trade up to bigger, more expensive houses,” said Doug McCoy, director of the Center on Real Estate Studies at Indiana University Kelley School of Business. “That would return affordable inventory to those coming behind them.” But with the run-up in rates, more homeowners are staying put.

The disappearance of starter homes

The problem isn’t just fewer homes on the market. More specifically, there’s a critical lack of single-family homes and starter homes. Starter homes are smaller (often 1,500 square feet or less) and generally more affordable, helping first-time homebuyers or lower-income families gain access to homeownership. 

But in today’s market, starter homes cost more than ever. In 2020, starter homes cost around $250,000. In the third quarter of 2023, starter homes cost around $345,900, according to the NAR. Ongoing supply-chain issues have made building small homes expensive. 

“It’s hard to build an affordable home today because of high labor costs, high material costs, high land costs and high entitlement costs,” McCoy said. Entitlement costs refer to how expensive it is to obtain the necessary permits and approvals for developing property.

In fact, the undersupply of single-family houses has been an issue since the 2007 financial crisis, said Carlos Garriga, research director at the St. Louis Federal Reserve. “This shortage stems from a shift in construction focus towards multifamily housing and large, high-end single-family homes,” he said. 

Experts say one key to unlocking housing affordability is expanding the supply of low-cost homes. “We need to see our local government entities treat this as a high priority,” McCoy said. “They’ll need to look at zoning, land-use planning and how they’re investing tax dollars to grow communities.”

First-time buyers are getting older

The age at which people buy their first home has been slowly trending up over the past few decades. In 2023, the average age of a first-time homebuyer was 35, which is the highest it’s been in nearly six decades, according to the NAR. Overall, the homeownership rate among young adults (ages 18 to 34) has consistently declined since the beginning of the 2008 housing market collapse.

This shift has a lot to do with financial obstacles, namely inflation, student debt and low wages. Not only does it take longer for prospective buyers to save up for a down payment on a home, but it’s also more difficult to fit home loan payments into monthly budgets. 

Societal shifts are another factor. Millennials tend to hit life milestones (like getting married, having children or purchasing a house) later than earlier generations, according to the Pew Research Center. While these trends may not be directly tied to affordability issues, it’s still important to understand when we’re thinking about generational wealth. 

Delaying the homebuying process further pushes off building home equity or being able to benefit from home-price appreciation. “For current generations saddled with more debt, this is particularly detrimental, as they have a harder time building wealth via savings and investments,” Tomic said.

How does homeownership contribute to wealth creation?

There’s a reason homeownership has long been considered the bedrock of American wealth-building. It’s a simple and generally predictable equation: As you pay off your mortgage, you build equity, and over time your home value increases, as does your net worth. That financial asset can then be passed on to your offspring and future generations, creating a snowball effect. According to a study by the Urban Institute, children of homeowners are 7% to 8% more likely to become homeowners themselves.

Home equity can also act as a safeguard for your financial health. It can be used to access other funding or to pay for major life expenses, like medical emergencies.

Despite today’s economic challenges, homeownership remains a major personal and financial goal for many Americans. “It gives people stability. It gives them hope. It gives them a connection to their community and meaning to their family,” McCoy said.

Will today’s housing affordability crisis impact future generational wealth?

Housing wealth accumulation depends on how soon someone is able to go from renting to owning — and whether they can maintain homeownership as opposed to going back to renting. For younger generations who are purchasing houses later, they’re losing out on building home equity, which is a key source of wealth. 

Financial stability — a product of that wealth — varies greatly across income and racial groups. While white households tend to have access to a mix of assets like stocks and other forms of real estate, Black and brown households hold the majority of their assets in their primary residences.

Today, homeownership rates are much lower for Black Americans (44%) compared with white Americans (77%), the widest homeownership gap in a decade. Today’s housing affordability crisis exacerbates the financial disparities that already weigh on marginalized groups, such as lack of access to credit and savings. 

“For most people, a house is their biggest asset and is often a big part of the wealth that gets passed down to future generations,” said Chuck Hawes, executive advisor at TIAA Wealth Management. “If you don’t have something to pass on, it’s not the end of the world, but it doesn’t give that next generation the potential to get a leg up.” 

It’s too early to tell how exactly today’s affordability crisis will impact future generational wealth — or if it will at all. But it’s an important question to ask. “We just don’t know how it’s going to turn out,” McCoy said. “In 35 or 40 years, it may not be a problem at all because we get this turned around. Or we could go in the other direction.”

What’s next for the housing market? 

The housing market won’t be repaired overnight, but economists say it’s not likely to crash like it did in 2008. “Unlike the run up to the Great Financial Crisis, the residential housing market isn’t flashing any warning signs about distress or bubbly buying behavior,” said Matt Graham of Mortgage News Daily. 

Today, one of the main issues is a lot of pent-up demand and not enough supply. While inventory should go up and prices should come down eventually, there won’t be a complete collapse of property prices like there was 16 years ago. And because mortgage lender standards are stricter, we won’t likely see the kind of foreclosure activity that rapidly depressed prices. 

Experts note that what’s needed to change the affordability equation is a combination of lower interest rates, rising household income, stable home prices and more housing inventory.

There’s only so much prospective homebuyers can control in today’s housing market. That’s why experts say it’s important to focus on personal factors that are within your control,…

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