Housing Affordability 2019 Update

Housing Affordability is at an All Time Low. Here’s Why.

Housing affordability is at an all-time low this year. According to a report released by Attom Data Solutions, housing affordability in the first quarter of 2018 was at its lowest since the market crash of 2008.

The home affordability index which was at a steady 102 has fallen down to 95 now.

Expensive homes are not just a problem in the coastal big cities. Affordability issues have spread inland to affect various areas, such as Atlanta, Denver, and Austin to name a few.

Coastal markets such as New York, San Francisco, and Los Angeles anyway pose a bigger problem in terms of historic affordability and every one of these cities has serious drug and homeless problems.

Here are some of the major reasons why housing affordability is at an all-time low:

Increasing Cost to Wage Ratio

The gap between individual wages and housing costs continues to widen year on year. The rate at which the economy is growing and the rate at which the housing prices are increasing every year are not in sync with the increase in the average wage rates.

Strong economy with a slow wage growth is historically known to cause a squeeze on the ability of potential homebuyers to close deals because the wage increase does not match the real estate price rise.

Home prices in six out of 10 housing markets are increasing at a faster rate than the median wage. Weekly average wages since Q1 2012 till date have only increased by 13%. This is significantly low in comparison to the 75% increase in median home prices during the same period.

The average weekly wage has increased at a rate of 3.3% year-over-year with the median home price witnessing an increase of 4.7%. The median home price in Q1 2018 was $245,000 across the country.

An average wage earner would have to spend a minimum of 31.2% of their weekly wages in mortgage payments in order to afford a median-priced home.

Notably, this figure is based on nationwide median calculation. In reality, there are many counties where the percentage of weekly wages needed to afford a home is even higher.

For instance, a wage earner in Monterey County, California will have to spend more than their entire average wages earned to afford a home.

Data suggests that 100.3% of the average wages would have to be kept aside to purchase a median-priced home. This figure is even more shocking for average wage earners in Brooklyn at 123.1% and 133.2% in San Francisco.

This data suggests that at present over 75% of the average wage earner cannot afford their own home. This figure holds true with a maximum front-end debt-to-income ratio of 28% and a typical down-payment of 3%.

Counties all across the country like Los Angeles County, Orange County (California), Maricopa County (Phoenix), and Cook County (Chicago) are equally affected by this disparity between increase in wages and housing prices.

The home affordability index is relative to historic averages. It takes into account the percentage of income that is required to purchase a median-price home. Index scores below 100 indicate less affordability while scores above 100 indicate higher affordability.

The home affordability index in Q1 2018 has fallen from 102 to 95. This is just a notch above the home affordability index of 86 in Q3 2008 when the market was at its lowest.

Increase in Mortgage Rates

As if the cost and income disparity was not enough, there is an increase in mortgage rates as well. Mortgage rates have seen an increase of 11% this year as compared to 2017.

Unfortunately, a reduction in home appreciation value could not do much in counteracting an increase in mortgage rates. In particular, the year 2018 is witnessing the highest rates in the past seven years.

As per a report by Bankrate, the national average 30-year fixed rate was 3.8% last year. However, this year it has seen a substantive jump to stay above 4.4%.

Borrowing costs have increased, but it has not affected the amount of loans taken out by potential homeowners. There has been a record increase in the number of loans taken out for buying homes in 2018. These figures have not been seen since 2011 and do not include the data figures of mortgage refinancing.

A major reason for an increase in the share of loans taken out for buying homes is that wage increase has steadily been outpaced by home appreciation.

Demand vs. Supply

As with every other economic commodity, excess demand tends to push up the prices of a product, when its supply is unmatched. With the economy booming, there is a scramble among potential homeowners to invest in real estate.

This is present even though the percentage increase in wages has not matched the increase in commodity rates, leading to alot of people facing financial difficulty and having trouble paying their rent. 

Shortage of inventory or houses on sale is fuelling prices to go skywards. This has led to a rapid increase in home price appreciation. No amount of checks has managed to put a stop on erosion of home affordability.

An important point to note here is that just a mere increase in the number of houses on sale will not help solve the affordability issue. Other factors namely wages, renting troubles, and mortgage rates will continue to increase the median-price of properties.

There is an ongoing inventory shortage across the country because builders are not building the way they used to. There should have been 2.3 million single family homes built in the last decade if housing permits were issued at historic rates as per Zillow.

The current figure of housing permits issued is 1.3 million per year on average. That equals to more than two years of lost buildings in the past decade alone. There is a major decline in the construction of single family homes in the US on a per capita basis.

Final Thoughts

The demographic reason why housing affordability is decreasing at an alarming rate in some cities is because many parents rush to the metros to buy homes in order to ensure their child has the added advantage of being one rung up in the socio-economic ladder.

As a result, housing affordability has always been a problem for the low-income group.

However, it is also noteworthy that middle-income groups are facing a cash crunch when it comes to purchasing a house in most of the cities. The prospect of further widening of the gap between wages and median-price of homes is definitely not a comforting thought for potential homebuyers.

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