It’s the Monday after a Sunday open house and a dozen potential buyers put in bids, sparking a fierce bidding war and driving up the sales price. It’s a scenario that’s replaying itself over and over again in real estate markets across the country. In the U.S., it’s a seller’s market, but housing has become historically unaffordable.
Economists prefer to see home price growth in the 4% range; that’s a healthy figure. For the last two years, however, homes prices in the U.S. have pushed up by 5.1% – already an unsustainable rate – and forecasters see upward of 6% as a possibility this year. That’s a problem, because personal income isn’t growing at as fast a clip. Many potential buyers simply don’t have the paycheck to afford the home they want to be in.
Why have prices climbed so steeply?
A major factor has been that demand has outpaced inventory, and especially for new, starter homes. Many builders — frustrated with rising construction costs, less-skilled labor and less viable land to build on — have abandoned affordable starter homes, heading instead into the luxury market. Keller Williams estimates the market is missing over 2 million homes that were never built.
Adding to the affordability issue is massive student loan debt, which has limited many buyers’ purchasing power, and soaring health care costs. Rising interest rates also aren’t helping. For a 30-year fixed mortgage, the difference between a 4% and a 5% interest rate is equivalent to a 10% increase in a homeowner’s monthly payment; a sizable amount.
The effects of the plunge in affordable housing have been widespread. It’s left sales volume static. Many first-time home buyers remain priced out of the market and stuck in rentals, which are also getting pricier. Of those who have bought, many have been forced to buy in a location far from their place of employment, leaving them saddled with long commutes.
Homeowners wanting to upgrade their starter house and purchase a larger home are also finding themselves in a holding pattern, unable to find a first-time buyer. It used to be homeowners stayed in the first home they purchased for five to seven years. Affordability issues have pushed out that timeline.