More Buyers “Priced Out” of Homeownership

More Buyers “Priced Out” of Homeownership

Households Continue to be Priced-Out by Higher Home Prices and Interest Rates Hikes.  Homeownership Declines.

February 2022

It is and has been a seller’s market for some time. Lack of supply and high demand have forced home prices upward. According to the NAR, the median home price in January 2022 was $361,700, up 14.6% percent year-over-year marking 117 consecutive months of price increases.  In some states, home prices have increased more by than 30 percent (CoreLogic 2021).  Increases in house prices and, soon, interest rates have an obvious impact on housing affordability and thereby homeownership with the average mortgage payment up $201 from a year ago (NAR 2022).  To demonstrate this impact, the National Association of Homebuilders releases it’s annual priced out estimates report.  The new estimates released this week show that 87.5 million households (roughly 69 percent of all U.S. households) are not able to afford a median priced new home in 2022, meaning their incomes are insufficient to qualify for a mortgage under standard underwriting criteria (Zhao 2022).

So, what’s causing the shortage of affordable homes?

New construction housing starts as a share of the real estate market have decreased by approximately 39

percent from January 2006 to June 2021. In fact, newly-constructed homes below 1,400 square feet—typically considered “entry-level” homes for first-time homebuyers—represent less than 10 percent of all new builds (Bernstein et. Al 2021). According to the National Association of Homebuilders, starter home supply is short by 1MM homes. In 2020 only 65,000 starter homes were built (compared to 418k average in the 1970’s), yet 2.38MM first-time buyers entered the market (Khater 2021).  At our current new construction building pace, we’ll never meet the demand.

In the meantime, successive presidential administrations have failed to adequately spur the development of affordable new homes to meet the need of low- and moderate-income households through policy aimed at homeownership.  Further, at the local and regional levels, too many communities rely on old and murky zoning and land-use regulations that restrict the creation of more housing options or make it difficult to deliver the density often needed to make affordable homeownership work.  Lastly, there are often simply not enough federal and local resources available to offset increasing production costs while also meeting high demand.

In addition to the problem of supply, it’s critical to all attention to demand. Why are so few people able to afford today’s median priced new home?  Part of the issue is the redistribution of wealth in America and the shrinking middle class.  According to PEW Research, the share of American adults who live in middle-income households has decreased from 61% to 51% over the last fifty years and the share of aggregate income going to middle-class households fell from 62% to 43%.  Income and wage growth have only grown modestly and have not kept up with the cost of living and the wealth gap continues to widen.  As prices continue their upward momentum, as inflation increases, and as interest rates hikes loom, this downward shift in income has reduced the number of households that could afford an average middle-class home, hence, more demand.

For many, the social and economic consequences of the housing crisis have been and will continue to be detrimental. Low interest rates notwithstanding, the number of Americans making the median income that can afford to become homeowners continues to drop.   Homeownership has become increasingly out of reach for many working families, young households, and people of color.

The passage of the 2022 Budget Resolution is the first step in the right direction offering more resources for affordable housing.  But many of these resources are dedicated to rental construction incentives and assistance.  We need more federal and local funds made available for the construction and preservation of single-family homes and fee simple townhome units.  And we need significant reform to zoning and land-use regulations that reduce barriers to affordable homeownership—especially for people of color and working families.  Until we find a way to address these issues of systemic NIMBYism at a local level and link growing wealth inequality to housing demand at a federal level, we will not change the housing crisis story in a meaningful way.

References:

Bernstein, Jared, et al. “Alleviating Supply Constraints in the Housing Market.” The White House, The United States Government, 1 Sept. 2021, https://www.whitehouse.gov/cea/blog/2021/09/01/alleviating-supply-constraints-in-the-housing-market/.

“CoreLogic Reports Annual Home Price Growth of 17.2% – the Highest Level since the Late-1970s.” CoreLogic®, CoreLogic, 2 Aug. 2021, https://www.corelogic.com/press-releases/corelogic-reports-annual-home-price-growth-of-17-2-the-highest-level-since-the-late-1970s/.

Khater, Sam. “One of the Most Important Challenges Our Industry Will Face: The Significant Shortage of Starter Homes.” Freddie Mac Research and Perspectives. Freddie Mac, April 15, 2021. http://www.freddiemac.com/perspectives/sam_khater/20210415_single_family_shortage.page.

“Two Thirds of Metros Reached Double Digit Price Appreciation in Fourth Quarter of 2021.” National Association of Realtors Newsroom, National Association of Realtors.  February 10,2022.  https://www.nar.realtor/newsroom/two-thirds-of-metros-reached-double-digit-price-appreciation-in-fourth-quarter-of-2021

Zhao, Na. “Nahb 2022 ‘Priced out’ Estimates: Eye on Housing.” Eye On Housing Blog, National Association of Homebuilding, 10 Feb. 2022, https://eyeonhousing.org/2022/02/nahb-2022-priced-out-estimates/