Remember the classic image of a smiling couple, their two children, a dog, and a house surrounded by a white picket fence? It symbolized homeownership, a desirable and highly attainable part of the American dream. This is a possible aspect. But today, that picture-perfect vision has become a terribly faded photograph.
“I don’t want to be overly dramatic, but this housing crisis has shattered the American dream for many low- and middle-income families,” said Sarah Dickerson, an assistant professor and research economist at the University of North Carolina at Kenan. . Private Enterprise Research Institute. “The share of housing on the market that middle-class households can afford is much smaller than it was before the pandemic.”
teeth Is Dickinson too dramatic? i don’t think so. Not only the number of first time home buyer This is a record low, but housing affordability This is also the worst since the 1980s. And the long-term effects can be severe. Homeownership is more than just having a place to rest your head. When middle-class families cannot afford to buy a home, they miss out on the opportunity to build wealth and stability for themselves and future generations.
What led to this situation, and why has homeownership become so out of reach for so many Americans?
What is the reason for not being able to buy a house?
Due to a combination of various factors, home ownership Inventory issues, slowing wage growth, high mortgage rates, and rising maintenance costs, to name a few, are beyond the reach of middle-income households. Let’s take a look at the impact of each.
shortage of supply
meanwhile housing stock Although demand has been slowly increasing recently, we have been facing a severe supply shortage for quite some time, by some estimates as high as 5.5 million units. This is largely due to a decline in new housing construction dating back to 2008, when the subprime mortgage financial crisis triggered the Great Recession.
“The housing bubble burst and we had a period of reduced construction in the period that followed,” said Kyle K. Moore, an economist at EPI Action, a nonpartisan nonprofit that conducts research and analysis on economic and labor issues. say. “The 2020 pandemic further exacerbated the situation by creating supply shortages due to rising prices of building materials.”
It’s not just the lack of housing in general, but the lack of affordable housing in particular. Tough times have led many home builders to focus on supplying housing. luxury goods market. As a result, there are fewer homes available in the middle class price range, further increasing competition and pricing. We need more “middle-income housing in short supply,” or medium-density housing options like starter homes and townhomes that the average family can afford.
wage stagnation
Although the frenzied pace of pandemic sales has slowed in recent days. housing prices It continues to rise, hitting new highs every month. And they are increasing faster than many Americans’ wages, widening the affordability gap. Want to buy a typical median-priced home?“Median” now means $400,000 or more— Even if your W-2 doesn’t report six-figure wages, good luck. Considering that, this is a sobering thought. median salary The Bureau of Labor Statistics reported that he earned just $60,580 in the third quarter of 2024.
“If you go back to the 1950s and 1960s, the average home price was a little more than twice the average family salary,” says Creighton University law professor David P. Weber. “Even five years ago, it was about four to five times the average income.
“Right now, it’s about six times the average income, and that’s inflation-adjusted. House prices are rising faster than income growth, and that’s a very big part of the problem. ”
expensive home loan
Of course, most people take out a loan rather than paying the full price for their home. And that brings with it another problem: high borrowing costs. Mortgage rates, which were ultra-low during the pandemic (think 2% to 3%), began to rise dramatically in mid-2021, when the Federal Reserve began raising interest rates to combat inflation. There has been some softening since then, but overall it remains high. In fact, mortgage rates rose to 7% for the first time since the summer, even though the Fed cut rates in September and November.
Higher interest rates mean fewer buyers available. monthly mortgage payment For homes priced at current market rates. According to What happens to the down payment required for down payment and closing costs? Bankrate’s 2024 Down Payment SurveyMore than half of people who want to own a home cannot afford these out-of-pocket expenses due to high living costs and low incomes. No wonder, on that median price home of $400,000, the proverbial 20 percent down payment is a whopping $80,000. Even the 3 percent or 3.5 percent down payment allowed on some loans can cost five figures.
At the same time, homeowners are not selling their homes because they don’t want to part with the record-low mortgage rates they secured during the pandemic. “If they were to re-enter the market now, they would be hard-pressed to find anything better or comparable to what they have now,” Dickerson says. “For those in middle-class households who are patiently waiting[to buy a home]now is not yet an ideal time to find housing that is affordable for them.”
I was so excited mortgage interest rate It’s a double whammy for housing affordability, hurting both home buyers and sellers and impacting both supply and demand.
Higher cost of ownership
Single-family homes are becoming more expensive to not only buy, but to own in the United States. Bank rates in 2024 Investigating the hidden costs of homeownership calculates that it costs more than $18,000 a year to maintain an old (or new) mansion, a 26% increase from just four years ago.
please remember 28/36 ruleswhich states that families can’t spend more than 28 percent of their income on housing costs and no more than 36 percent of their total debt?That traditional standard is outdated. As Weber points out, “The average family spends about 35 percent of their average gross salary (alone) on housing costs, which means all other finances will be strained as well.” I will.”
Ongoing home ownership costs typically include not only your mortgage payment, but also regular repairs and maintenance, property taxes, and homeowners insurance. In particular, the latter is also rapidly increasing.
“The cost is astronomical,” says Daniel Smith, founder and CEO of Keepingly, a platform that helps people manage all their home management needs in one place. “In some states, insurance premiums alone have increased by 50 percent. These are the types of costs that people often overlook when thinking about homeownership.”
The long-term effects of unaffordable housing
When you add all of these factors together — a housing shortage, high prices and down payments, rising interest rates, and ongoing ownership costs — you have the perfect, albeit unpleasant, recipe for a home affordability crisis. The economic outlook is grim for middle-income households as they try to balance all of the challenges mentioned above.
Lose the opportunity to build assets
One of the biggest benefits of owning a home is grow capital And build wealth over time. The average homeowner with a current mortgage is $319,000 in stockOf that, $207,000 is tappable (i.e., the amount you can borrow with a 20% cushion remaining, as most lenders require). Home equity has economic power. Homeowners can access the value of their home without having to sell, which becomes increasingly important as they get older.
“For people who haven’t been able to save well in a 401(k) or company retirement plan, their home may be their most important asset when considering end-of-life decisions and long-term care,” says Weber. “If that home doesn’t exist and the assets that can be leveraged don’t exist, then there are potential problems down the road. People who haven’t been able to create that wealth will continue to need care as they get older.” How will that be financed?”
There’s nothing to take over
Not being able to afford a home doesn’t just affect families today. Future generations are also at risk.
Homes are often the most valuable assets people own. Home ownership is not a perfect method of wealth transfer, as the housing market is unpredictable and property values fluctuate. Nevertheless, as Moore states, “This is probably the best tool in our toolbox” when it comes to construction. intergenerational wealth. Those most disenfranchised may be groups that have historically been excluded from homeownership.
Housing equity drove wealth growth among Black Americans from 2019 to 2022, but only 44% of Black Americans owned a home. And the gap between rich and poor is only widening. It’s over 2.4 million yen. wealth disparity between the median for white and black households.
“Communities that already have a wealth gap may end up with a generation that doesn’t have the wealth to pass on,” Smith said. “Unless we can find additional avenues to generate wealth, they will be the ones most affected.”
Impact of the housing crisis on the middle class
The longer the housing market remains unaffordable, the longer it will take middle-income earners to build wealth and become financially stable. According to a survey from urban research instituteHeads of households who purchase their first home by age 35 accumulate significantly more home equity by age 60 than those who purchase later. The housing crisis has left many aspiring homeowners on the sidelines, waiting for a day that will never come.
Delays in wealth accumulation can also impact middle-income households’ ability to adequately save for everyday necessities and financial milestones in retirement. Lack of home can also have a huge impact on emotional and mental health.
“We know that housing stability is associated with higher stress levels in both children and adults,” Dickerson added. “Educational outcomes will be worse if children are forced to move frequently during their early years, perhaps due to rising rents.”
To put it bluntly, the American dream of homeownership is surrounded by ever-higher and wider walls for the middle class. We must understand the short- and long-term consequences of unaffordable housing and seek solutions sooner rather than later. Unless we do so, more and more families will find themselves on the wrong side of that idyllic white picket fence.
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