Could the US be flirting with a crisis of housing affordability in 2023? This crisis has been developing for many years, slowly at first and then rapidly over the previous two. Put simply, in every major market (and most not-so-major ones), buying a home is no longer affordable for a family earning the median annual income. I contribute this crisis to 3 major factors and 1 major misconception that we will discuss further.
Supply Side Problems
First, both nationally and in many local markets, new home builds simply aren’t keeping up with demand. The reasons are numerous, and you can find well-researched explanations of everything from supply chain problems to zoning and permitting complexity among many others, but we’ll focus on the major cause: not enough workers.
The labor shortage in housing construction is not new: it started in 2008 as the housing bubble burst and the Great Recession began. At the risk of oversimplifying, people in the field found other jobs and didn’t look back, and far too few filled in behind them. Once the market was ready to build again, there weren’t enough people doing the building.
This labor shortage is a nationwide problem, with Moody’s estimating a shortfall of 1.5 million homes in the US and the National Association of Home Builders (NAHB) projecting a need for 2.2 million new hires through 2024.
The math here doesn’t have to be complicated: if a market (or a nation) can’t build enough homes to meet demand, prices rise. And as prices rise, more and more would-be homeowners become mortgage-burdened or are priced out of the market entirely.
The Rise of Home Prices
Another of the most visible contributors to the housing crisis is the significant rise in home prices nationwide, The last several years have seen yearly jumps by 15% or more in the median price for existing homes, far outpacing wage growth.
Nationwide, the median home price has more than doubled from 2009 to 2022, and $100,000 of that rise in value has occurred since Q2 2020. Real median household income over that same span grew modestly from $63,000 to just over $70,000 in 2021— and actually declined noticeably from a 2019 peak.
Signs point to some wage growth in 2023, but nowhere near proportional to the increase in home prices.
And while wages have grown only modestly, inflation throughout nearly every sector of the economy is causing households to stretch their wages further: if people are spending 8% more on groceries than a year ago, the difference has to come from somewhere. In many cases, it shows up as less money put into savings (such as for a down payment).
To sum up: home prices are rising exponentially relative to income, even as inflation eats away at that income. It’s not a healthy place for would-be homeowners.
Reining In Inflation
In an effort to rein in inflation, the Federal Reserve has aggressively increased interest rates, with seven consecutive rate hikes through 2022 and even more projected for 2023. We could argue about how we got here regarding inflation and how printing billions in free money was bound to have some sort of downside, but that’s a bit beside the point.
What IS the point is that rising interest rates directly affect mortgage rates and thus the purchasing power of the average family. The goal here is to cool down spending by making borrowing more painful. But making borrowing more painful has a (perhaps unintended?) consequence: it makes buying a house more expensive and more difficult.
Clearing Up Misconceptions
Buying a home—once a pillar of the American Dream—is now a severe financial burden or simply out of reach for more than half of US households. And just about every number and metric you can find is trending in the wrong direction.
One of the biggest misconceptions for would-be home buyers is the amount of down payment needed. Only 11% realize that a home could be purchased with just 5% down, and about 45% believe that a down payment of around 20% is needed. This is according to the latest survey from the National Association of Realtors.
Additionally, two-thirds of millennials say they don’t have enough saved for a down payment, but that’s because many felt they needed to save 20% of the purchase price according to Apartment List
This couldn’t be further from the truth. When a home buyer is looking to overcome the home affordability challenges it’s always best to work with a mortgage broker over a bank or credit union.
Benefits of Using a Broker Over a Bank
When new home buyers consider purchasing a home, they often face the daunting task of navigating the complex world of mortgages and financing options. This is where the expertise of a mortgage broker can prove invaluable. Here are some advantages of using a broker over a bank:
a. Access to a Wide Range of Lenders: Mortgage brokers have connections with multiple lenders, including traditional banks, credit unions, and alternative financing sources. This extensive network allows brokers to offer borrowers a wider range of loan options tailored to their specific needs and financial situations.
b. Competitive Interest Rates: Brokers can help borrowers find the most competitive interest rates available in the market. By leveraging their relationships with different lenders, brokers can negotiate on behalf of their clients, potentially securing lower rates and saving borrowers money over the life of the loan.
c. Personalized Guidance: Brokers provide personalized guidance throughout the mortgage process. They take the time to understand their clients’ financial goals and help them navigate the complex paperwork and requirements. Brokers can also offer valuable advice on credit improvement strategies and down payment assistance programs.
d. Time and Convenience: Working with a mortgage broker saves time and effort. Brokers handle the legwork of shopping for loans, comparing rates, and submitting applications. This streamlines the process, allowing borrowers to focus on other aspects of homeownership, such as property search and inspection.
As we continue through 2023 and into 2024, the United States is facing a looming crisis of housing affordability. The combination of supply-side problems, soaring home prices, and the impact of inflation has created significant barriers to homeownership for the average American family. The dream of owning a home, once synonymous with the American Dream, has become a financial burden or an unattainable goal for many.
While the housing affordability crisis looms large in 2023, it is crucial to dispel misconceptions, explore alternative financing options, and seek guidance from professionals who can navigate the complex landscape of homeownership. By addressing the root causes of the crisis and working towards practical solutions, we can aim to make the dream of owning a home a reality for more individuals and families across the United States.