Shauna Hatch

Introduction

The rise in the cost of housing has many Americans worried. As housing consumes an increasing percentage of a household’s income, other areas of individual and family lives are negatively affected. The effects of less money for necessities and extras will grow as more and more households become cost-burdened. Let’s examine the state of the housing market and what the effects of high household costs are.

Rent Rates

Renters see no relief on the horizon as average rates continue to rise. While rates dropped slightly over the last year for 0- and three-bedroom apartments, national average rent went up from 2020-2021 for one-and two-bedroom apartments. In June 2021, the numbers for apartments showed the rents changes overall were:

• 0-BR: $1,641 (+0.6% from prior month / -3.1% year-over-year)
• 1-BR: $1,711 (+2.9% from prior month / +5.2% year-over-year)
• 2-BR: $1,972 (+1.9% from prior month / +4.8% year-over-year)
• 3-BR: $2,012 (-2.8% from prior month / -1.4% year-over-year)

Rent varies widely per city, even in the highest top ten. Washington, D.C. has the highest average rent in the United States, $2,324 a month for a one-bedroom apartment. D.C. has the highest median household income at $85,203 a year, so it’s no surprise that rent follows suit. In states with higher incomes, rent is usually higher.

The 10 states with the highest average rent are:

• Hawaii ($1,617)
• California ($1,503)
• Maryland ($1,392)
• New Jersey ($1,334)
• Massachusetts ($1,282)
• New York ($1,280)
• Colorado ($1,271)
• Washington ($1,258)
• Alaska ($1,244)
• Virginia ($1,234)

The lowest five states are:

• West Virginia ($628)
• Montana ($678)
• Oklahoma ($699)
• Wyoming ($706)
• Kansas ($713)

Some large cities saw decreases in rent during 2020, including New York City (-21%), Seattle (-20%), and Boston (-19%). Others saw increases, such as Boise (+12%), Fresno (+11%), and Gilbert (+8%), reflecting the trend of people leaving big cities.

Increases over the past year aren’t consistent across the board. However, if we step back and look at the last decade, rental prices for apartments have risen by 32% in nominal dollars since 2010, up to $1,400 per month. The average rent for houses and apartments has increased by more than 30% over the last decade, with some areas growing far more than that. Washington and Oregon saw their average rents increase by nearly 74% and 67%, respectively (ibid.).

Buying a House

In the last year and a half, home prices have risen to record highs. To illustrate the dramatic rise, the average cost of a home in Kauai, Maui, and Oahu hit the million-dollar mark this year! (Just in case you’re wondering, that’s $5,258 a month with 20% down at 3.12% interest on a 30-year loan!)

While prices have skyrocketed in the last year and a half, let’s back up 20 years and see just how fast prices have risen. The average home price in December 2000 was $139,613.38. In December 2010, the average home price was $174,684.92. Jump to December 2020, and the average home price had increased to $300,717.57, a 72% increase in just ten years! By July 2021, the price had jumped to $385,000 for active listings!

A recent slowdown (summer 2021) is finally giving buyers slim hope for the future. This dramatic increase has many worried about the impact that high housing prices will have on a population that has seen average wages increase from only $30,846.09 in 2000 to $39,959.30 in 2010 (a 29.5% increase) to $51,168 in 2020 (a 28% increase). While housing may be slowing down, that doesn’t mean prices are dropping everywhere. In fact, the market continues to rise, albeit more slowly than in the last 18 months.

How many Americans will be able to afford a house next year, in five years, and beyond, remains to be seen. The Covid pandemic decreased homeownership rates by 2.5%, from 67.9% in the second quarter of 2020 to 65.4% in the second quarter of 2021. If rates continue to drop that quickly, America could return to its low homeownership rates of 60% in 1956 or keep sliding to or below 43.6% in 1940! Let’s hope this doesn’t happen. Either the price of homes needs to drop, financing options need to change, or incomes need to match the cost of homeownership.

The Rise in Cost-Burdened Home Owners and Tenants

The federal government defines affordable housing as “any housing unit whose gross monthly costs, including utilities, are equal to no more than 30% of a household’s gross monthly income.” Cost-burdened renters pay more than 30% of their income on rent. Severely cost-burdened spend more than 50% of their income on rent.

Before the pandemic, about a third of U.S. housing units were considered cost-burdened. In 2019, 37.1 million households were “housing cost burdened,” equating to 30.2% of all households nationwide. One in seven households-17.6 million-were “severely cost burdened.”

According to the State of the Nation’s Housing 2021 report by Harvard University’s Joint Center For Housing Studies, “Many households that fell behind on their housing payments in 2020 were already cost burdened. Nearly half of all renter households (20.4 million) and a fifth of homeowner households (16.7 million) spent more than 30% of their incomes on housing in 2019. Of these households, 17.6 million spent more than 50% of their incomes on housing!”

When numbers come out for 2020, they’re sure to be even higher!

The pandemic hasn’t helped cost-burdened households. At the beginning of 2021, nearly a quarter of low-income renters and homeowners were behind on housing payments (ibid.) In the first quarter of 2021, of those in the $25,000-34,999 income range, 19% were behind on housing payments; in the $35,000-44,999 range, 16% were behind; and in the $50,000-74,999 income range, 11% were behind.

It seems overly optimistic to think that the increase in home prices and rent will have a positive result over the next year and beyond. Indeed, change needs to come; the sooner, the better.

California

What are the long-term effects of high housing costs over the long term? Let’s focus on California, the state with the second-highest cost of housing in the United States (behind Hawaii). Housing prices have been high in California for some time, drawing further away from the rest of the nation in the seventies. By 2015, the average California home prices were two-and-a-half times higher than the average national home prices (ibid.)! How high has the cost of housing risen in the last few years? How is this affecting the population?

First, let’s look at the cost of a home loan. The median home price in California was $666,320 in July 2020 and up to $811,170 in July 2021, a 21.7% increase! The median household income was $75,235 in 2019 (the latest year that figures are available). Let’s assume that the median household income in California is $78,996.75 in July 2021 (an increase of five percent, $3,761.75). If we stick to the max income-to-housing cost number of 30% of monthly income, we get $1,975.92 for a monthly payment (this doesn’t consider the costs of owning a home, such as taxes and upkeep). Monthly payments on an $811,170 home with a 2.9% interest rate would be $3,376.33 a month, 171% of the max recommended amount of 30% of gross income.

What about renting? If we take the median income of $78,996.75 again and find the 30% max monthly payment, we’re looking at $1,975.92 per month. The median monthly gross residential rent in California was $1,657 in 2019, the latest year for which numbers are available. Let’s raise that by five percent, or $82.85, to $1,739.85 for an estimated 2020 max rental-payment-per-month rate. The median rent in California was $1,614 in 2019. Raise this by five percent for 2020 (an $80.70 increase), and we’ll assume the median rent in California in 2020 was around $1,694.70. These numbers are more promising. However, keep in mind that these are the median figures, meaning some renters will find lower rents, but many other renters have a higher rental burden. 

Californians are tired of the high cost of living, including the seemingly unsustainable cost of housing. From July 1, 2019, to July 1, 2020, the state’s population increased by 0.05%, yet it’s estimated that 135,600 more people left the state during that period. The cost of housing (combined with other factors) is driving people out of the state.

Effects of High Housing Costs

When faced with high housing costs, a 2015 report by the Legislative Analyst’s Office of California lists five trade-offs that households make:

• Spending a larger share of income on housing
• Postponing or foregoing homeownership
• Living in more crowded housing
• Commuting further to work each day
• Choosing to work and live elsewhere

All five of these trade-offs have unpleasant side effects, such as 

• Less money to cover transportation, food, education, entertainment, and healthcare; 
• Lower homeownership rates; 
• Unsanitary conditions that can negatively affect mental health; 
• Elevated pollution; 
• Increases in homelessness; 
• Loss of skilled labor due to an exodus from crowded areas.

Solving the Housing Shortage

We won’t go into depth here on how to solve the housing shortage, but there are several things the government could do to ease the crisis.

• Build more manufactured homes and other cheaper housing
• Tax incentives
• Address the skilled labor deficit
• Make it more affordable to build (e.g., lower tariffs, tax breaks for builders, etc.)
• Ease permit and zoning laws

See our article, “Solving the Housing Supply Shortage“, in our In the Weeds blog for details on solutions and more ideas for how to solve the housing shortage (and thus, help lower housing costs)!

Summary

The housing crisis in the U.S. is a complicated issue. The rise in housing costs harms many who are already struggling. Being educated on the state of the housing market is a necessity for real estate professionals, homeowners, and potential buyers. Policymakers must have a clear understanding of the results of the increase in the housing market. Surely, with education and determination, they can change the course of housing costs in the future for this generation, as well as for generations to come.

Introduction

It’s no secret that the demand for single-family homes in the United States is greater than the supply. Not only are fewer people selling their homes, but fewer homes are also being built! We must do something, but what? Let’s examine the housing supply problem, and then we’ll discuss several options for solving the issue!

The Building Rate

The building rate of the previous decade struggled to keep up with the pace of the 2000s when homes were being built at nearly twice the rate! From 1993 to 2007, over one million homes were completed per year, ranging from just 1,039,400 to over 1,654,500. The number of constructed homes dropped below the million mark in 2008 for the first time since 1992. And the number continued to slide to a low of 446,600 in 2011. Home production slowly rose to 911,700 in 2020, still significantly lower than the high of the 2000s.

According to Freddie Mac, at the beginning of 2020, the housing supply was short by 2.5 million units. Jump forward to June 2021, and according to the National Association of Realtors, the shortage increased to 5.5 million. Clearly, construction is not keeping up. 

Instead of growing to meet the demands of a growing population and shifts in demographics (Millennials and Gen Z’s want houses!), the rate of construction has decreased over the last couple of decades! From 1968 to 2000, the supply of housing increased at an average annual rate of 1.7%. In the past 20 years, the housing stock grew by a low average yearly rate of 1%, and in the last decade, it’s increased by only 0.7%.

In order to fill the underbuilding gap in the next ten years, the NAR estimated that more than two million housing units would need to be built per year – an increase of more than 700,000 units per year relative to the pace of housing production in 2020.

Tim Glaze

As housing prices rise beyond sustainable levels for the average American (see our post, “Will Homeownership Bankrupt Americans”), many of us wonder what the solutions to more affordable homes are. Younger generations are losing hope for the American dream of homeownership. According to a survey by Fannie Mae, in 2019, only 30% of Millennials and Gen Z believed they would be able to find a home in their price range. That’s pretty discouraging! As prices have skyrocketed over the last year and a half, their fears haven’t diminished.

We need more homes built, and quick!

Housing Supply

As we’re all well aware, there just isn’t much out there to buy! Available homes for sale in 2020 dropped to lows not seen since 2003, and the rate is steadily rising, but not fast enough.

Myriad factors contribute to the housing supply crunch. Some of these contributors include the heavy demand for homes from Millennials, the largest group of homebuyers, the 2020 pandemic, tariffs on building supplies, restrictive zoning and permit laws, and the growing population of the United States.

There is a glimmer of hope as building rates are finally picking up in mid-2021. The cost of building supplies is dropping, encouraging contractors to pick up the pace. Is this enough to address the shortage? Can contractors build enough homes to keep up with the demand, let alone catch up?

While the obvious solution is to build more homes, the details that go into the process are complex and difficult. Let’s explore several pieces of the solution.

Tax Incentives

Thirty-four percent of homes in the United States are not owner-occupied. If even a tiny percentage of that supply was made available in the housing market, we could find some relief. Yes, this might cause an unwanted side-effect — a crunch on rental properties — but done right, renters might become owners.

Getting current landlords to sell would take some heavy incentives. The most tempting carrot might be the further implementation of tax exemptions for capital gains. Combine that with tax breaks for first-time homebuyers, renters who want to become owners, and sellers of rental properties who wish to sell, and it just might alleviate some of the supply crunch.

Manufactured Homes

Manufactured homes have had a negative image for decades, but that’s changing. As standards for the quality of building requirements have gone up and studies show that manufactured homes retain their value similar to site-built homes, the image is sporting a newly polished gleam.

Manufactured homes reportedly cost an average of $57 per square foot, whereas site-built homes cost $119 per square foot (although that has likely increased since that article was written). This difference in cost is a promising draw for those looking for cheaper yet appealing alternatives.

A push on manufactured homes, including a robust education campaign for would-be homeowners, could increase the demand for these options.

Build More Homes!

The obvious solution to a shortage is to provide more of the product. But exactly how to do this is the dilemma. Let’s examine several solutions that, when used together, could significantly increase the number of homes being built!

Address the Skilled Labor Deficit

During the Great Recession, approximately 1.5 million construction workers (tradesmen, electricians, carpenters, etc.) either quit or lost their jobs. Over the last decade, about 900,000 workers have returned, but that’s nowhere near enough.

Why aren’t there enough workers to fill the openings at construction companies? Several reasons explain the gap.

First, very few women work in the field. Only nine percent of construction workers are female, and many are in administrative and office positions. Fieldwork is often grueling and open to the elements. Breaking into a male-dominated industry is hard, and the pay and the work aren’t appealing enough to make it worth the difficulty of making those inroads.

Second, getting into the industry and working your way up is often tricky. Many entry-level jobs are unskilled, and the pay shows it. It takes years to work through the ranks and the pay scale. For many, the income simply isn’t worth the grueling work.

As for skilled laborers, training is time-consuming, and many students are unaware that construction is an option. Many schools don’t present construction as a satisfying or well-paying option because it doesn’t always require a college degree. And colleges have done a great job of pushing everyone and anyone into degrees that may not match their ability and skill level.

Lastly, there is a stigma about construction workers in American society, which is often inaccurate and harmful to the industry. Changing the way Americans look at construction jobs and educating students about the benefits and potential for significant income is a step in the right direction. Isn’t it about time that we see an informative commercial from the National Tradesman group?

Make it More Affordable to Build

Lifting Tariffs on Building Supplies

The tariffs levied on Canadian lumber in 2017 and 2018 aren’t the sole cause of the scary-high lumber prices of late 2020 and 2021, but they aren’t helping either. At nine percent, the tariff on Canadian lumber is steep compared to the average tariff of 1.59% for all tariffs imposed on other countries by the United States in 2018. Lowering the tariffs won’t solve the problem, but it would surely help. This option would take some significant changes in the U.S. Commerce Department’s policies though; in May 2021 (despite the insanely high lumber prices) they recommended doubling the tariffs!

Tax Breaks on New Construction (see “Tax Incentives” above).

We’ve already discussed tax incentives (see “Tax Incentives” above). This is a viable option that would encourage new home building (as well as selling!).

Lighten Permits and Restrictive Zoning Laws

The United States is due for sweeping housing legislation. Lightening permit requirements and striking down restrictive zoning laws are steps that we urgently need to take. Allowing for denser zoning laws can increase the number of homes permitted in areas with available space. Easing permit requirements, including the cost and excessive time to acquire permits, is a must.

The recent infrastructure proposal, which has bipartisan support, shows hopeful progress. The bill will affect zoning laws, opening more currently off-limits areas to construction. States need to address the issue on their own, and many are. We’ll address that in the next section.

What Certain States Are Doing

States are being creative in addressing the housing shortage. Here are a few examples:

Utah’s legislature just passed House Bill 82. This legislation allows Utahns to rent out internal accessory dwellings (basement and mother-in-law apartments) statewide.

California legislature passed a law that allows homeowners to turn garages into residential space and build small homes (granny flats) in their backyards.

Oregon passed a five-year Statewide Housing Plan in 2019. This plan includes six policy priorities, one of which is “expanding homeownership opportunities.

North Carolina declared it unlawful to discriminate if a “development or proposed development contains affordable housing units for families or individuals with incomes below eight percent of the area median income.”

Minnesota created new workgroups to address a few issues, including “increase affordable and accessible housing options.”

Conclusion

It’s not a matter of if we implemented changes; it’s a matter of when! Change is necessary if the American dream of homeownership is going to remain within reach of many Americans. It will be interesting to see what emerges, is implemented, and results from the chaotic real estate industry over the next year as we emerge from the pandemic and try to recover and move forward.

Can the Average American Afford a Home Anymore?

Recently, one of my Millennial children tried to buy a home in the Layton, Utah, area. He repeatedly bid against people offering more than $20k above the asking price. Realizing he had to have even more cash upfront, he managed to come up with an extra $15k to add to his bids, but it still wasn’t enough. He simply didn’t have the extra stores of cash to outbid those who did. After months of being outbid, he decided to wait and see if the housing market cools off a bit. So he stayed in the rental he’s in now, with his roommate (how many Millennials can afford a place by themselves these days?), paying $1,800 a month in rent for a home that would cost him about $1,500 a month to buy.

I can’t help but wonder if any of my children will ever be able to afford a single-family home on their own, without roommates sharing the burden. The American dream of homeownership has changed significantly in the last year, and for many people, it’s not for the better. I can’t help but wonder how Americans will fare as they settle into exorbitant mortgages that swallow up significant chunks of their income!

Homeownership in the United States

In the last ten years, existing single-family homes for sale have declined more than 30%. The decline in home supply and myriad other factors has caused the price of homes to explode. The median home price has gone from $172,935.67 ($198,617.62 adjusted for inflation) in December 2011 to $372,400 in April 2021.

With the largest increase in home prices in the history of the United States and the significant decline in available single-family homes, the future of homeownership for many Millennials and Generation Zs is murky.

The average homeownership rate (the proportion of homes owned by their occupants) in the United States had grown since 1890, when it was 47.8%, to 69.2% in April 2004. By April 2021, the rate fell to 64.6%. Due to covid-19 and the subsequent rise in building supply costs and drop in inventory, the effects on homeownership are yet to be seen. With mortgages surpassing the tolerance of many American households’ income (more to come on that), it seems as if a slowdown in homeownership and an increase in foreclosures is inevitable. As high net worth individuals and institutional investors continue to snatch up homes and further reduce the housing supply, they drive the prices even higher. Is there any hope for the rising generations?

How Much is Too Much?

Speculation about what to do about the fading dream of homeownership for many Americans has yet to bring up any realistic solutions. As the median price of homes increases, it’s natural to wonder how much an American household can really afford for a mortgage! Are we beyond the point of no return for many Americans and the rising generation, or is there still hope?

How Much of a Household’s Income Can Be Considered a Realistic Amount to Put Towards a Monthly Mortgage?

It depends. It depends on who you ask, and it depends on a family’s tolerance for debt.

Suggestions on mortgage payment tolerance levels from financial advisors generally range from 25% of your gross monthly income to 28% (the Monthly Income Rule). The Annual Salary Rule suggests that the ideal mortgage should be three times your annual salary (or less). Ask a bank or loan officer, though, and their suggestions are higher, ranging from 28% to 35%. But the range goes even higher! The Consumer Financial Protection Bureau (CFPB) reports that households can rise to 45% on their debt-to-income ratio. If a consumer has no other debt, the CFPB states that it’s acceptable to loan a qualified buyer that amount for a home!

Imagine paying 45% of your gross income to housing costs. Maybe you already do! For too many people, that’s far too much to put towards the roof over their heads.

How Many Americans Will Be Able to Make Their Mortgage Payments in the Coming Years?

Studies show that consumers with a debt-to-income ratio higher than 43% have a higher likelihood of struggling to make their mortgage payments than consumers with lower debt-to-income ratios. Historically, consumers who stay below a 28% debt-to-income ratio have fewer issues paying their mortgages over time than consumers with higher debt-to-income ratios.

Median Housing Prices vs Median Household Income

Let’s take a look at how this all plays out for the current state of mortgage costs and the median American household income.

Median House Price and Median Income

The median price of a home in the United States in April 2021 was $372,400. A borrower with a 30-year fixed-rate mortgage with a 10% down payment and a 3.132% APR will pay about $2,093 a month for a mortgage payment. If we apply the 28% rule to the median income of American households – $79,900 – the monthly payment would be $1,864 per month (or lower!). That’s $229 above the 28% comfort level.

According to the U.S. Bureau of Labor Statistics, housing costs ranged from 27.5% to 36.8%, with an average of 32.9% of household spending going towards housing costs. In the United States, the median average monthly mortgage payment is 31.4% of the median household income. That’s higher than the 28% comfort level that many experts suggest. It’s also higher than the historical data shows, as mentioned earlier, as a cut-off line for those who are more likely to make their mortgage payments over time.

It’s Not Set in Stone

Of course, many factors can cause vast variations in the monthly payments (a higher or lower down payment, higher or lower interest rates, etc.), and keep in mind; these are the median numbers. That means that a lot of houses cost less, and a lot of houses cost more, much more. Not to mention, many people earn significantly less, and many people make considerably more than the median American household income.

If we stick to the recommended percentages, median housing costs in the U.S. fit into median household income as far as mortgage payments as a percentage of monthly household earnings. These numbers are acceptable for those who make the median amount or higher but don’t sound great for those who don’t.

Foreclosures

With the FHFA mortgage moratorium still in effect until June 30, it’s impossible to get an accurate picture of what the foreclosure rate will do. The deadline gives borrowers time to apply for forbearance. Their forbearance can last up to 360 days, extending the time that many foreclosures will not be allowed.

Struggling to Make Payments

Are a lot of Americans behind on their mortgages? In February 2021, over 10 million homeowners were behind on mortgage payments. When the mortgage moratorium expires over the next year and borrowers are required to start paying their mortgage payments, along with making up their missed payments, the foreclosure amount will likely rise. Appraisers would be wise to be prepared for an increase in foreclosure appraisals as borrowers discover the extra burden of catching up is frankly too much!

Predicting the Future

Let’s face it, predicting the future in real estate is a fluid process at best. Last year was a surprise to many, and 2021 continues to smash ahead, pumping rates to impossible heights and gobbling up home supply in record time. Many factors continue to drive the price of houses up, with little apparent relief in the near future. Will 2022 be the year of the foreclosure, or will the economy balance out and borrowers rebound enough to keep their homes? We have to hope for the best!