5 reasons why housing is so expensive right now

As inflation, gas prices and other rising costs strained people’s wallets, housing continued to be a challenge for both buyers and renters.

Over the past year, the average house price has jumped more than 15%, according to data collected by the St. Louis Federal Reserve. And renters are in similar pain: On average, rents in May increased 15% from a year earlier, according to Redfin, but in some cities, like Austin, Nashville or Seattle, the increase was more than double. .

All this makes it increasingly difficult to find and offer shelter. And while this appears to have been exacerbated in recent months, home prices have been rising steadily for a decade, pushing home ownership and affordable rents out of reach for many.

Here is a look at some of the factors contributing to the difficult housing market and who is most affected.

Inflation and mortgage rates

In the first quarter of 2021, the average house price in the United States was $ 369,800, according to the St. Louis Federal Reserve. By the first quarter of 2022, the median home price had jumped to $ 423,600.

average house price

Graphic by Jenna Cohen / PBS NewsHour

With rising inflation – with the consumer price index reaching a 9% yoy increase in June, its highest in more than 40 years – the Federal Reserve has begun to raise interest rates. . This has led to higher mortgage rates, which are a product of inflation and interest rates, said Daryl Fairweather, chief economist for Redfin real estate brokerage. “As inflation is on the rise, it means that anyone who is lending money knows they won’t really get the real value unless they charge a [mortgage] rate because the money in the future will not be worth as much as the money today when there is inflation.

The result was a sharp and costly increase. According to Freddie Mac, the average rate on a 30-year fixed-rate mortgage has almost doubled from this period last year, from 2.8% in June 2021 to 5.52% in June this year.

This has slightly cooled the demand for homes and, in turn, house prices. But what people could save on the purchase price could be written off by taking into account mortgage rates, which at their current level could add nearly $ 100,000 to the cost of a $ 200,000 mortgage over the course of 30 years.

Wages

Although inflation is a recent factor, house prices have risen since the low point of the 2012 housing slump.

Buying a home is out of reach for many people whose wages have not kept pace with inflation and the general rise in prices. A February 2022 National Association of Realtors report found that a family earning between $ 75,000 and $ 100,000 a year could afford about half the active home listings.

In 2020, the median household income level was $ 67,521, according to census data analyzed by the Federal Reserve. For people in that income bracket, options dwindled rapidly – they could only afford 34% of the available real estate assets. Only “35% of whites, 25% of Hispanics and only 20% of black Americans have an income of more than $ 100,000,” according to the report.

Amid the skyrocketing prices, many would-be homebuyers essentially have two options: renting where they are or moving elsewhere.

Buying a home in a cheaper area may seem tempting, but it may be unsustainable for those who need to live where they work. And, buying a home in a different market creates its ripple effects.

1950-2020

Graphic by Jenna Cohen / PBS NewsHour

If a potential buyer lives in San Francisco, “where the median home price is $ 1.5 million and you move to Sacramento where it’s more than $ 450,000, that’s a huge savings,” Fairweather said. “But what happens then is that housing prices in Sacramento go up and people living in Sacramento for rent, for example, face a lot more competition. Their property taxes probably increase as well. And so the locals have a low price and then have to move back to the next cheaper subway. ”

Even the smallest apartments are too expensive for low-income workers, according to the National Low Income Housing Coalition. In 2021, a worker is expected to earn $ 24.90 an hour to afford a “modest two-bedroom apartment,” NLIHC wrote in a recent report. While some states and cities have minimum wages above the federal minimum of $ 7, 25 an hour, no worker anywhere in the country who earns a state, federal or local minimum wage for a 40-hour work week can currently afford “a modest two-bedroom rental at a fair market rent. , the report states.

“Housing at the lower end of the rental market,” said Steve Berg, vice president of programs and policies at the National Alliance to End Homelessness, “has continually grown substantially faster than earnings at the lower end of the wage market. “.

The biggest problem in the cost of finding shelter is the supply. According to Freddie Mac, the United States has a deficit of 3.8 million units needed to meet current demand.

“Manufacturers haven’t built enough to meet demand,” Fairweather said. “We had fewer homes built in the 2010s than in any decade in the 1960s. But net demand continued to rise, especially as millennials entered the home buying age. ”

total cost of the mortgage

Graphic by Jenna Cohen / PBS NewsHour

Washington, DC, for example, was about 156,000 fewer than what it needed in 2019, according to a new report Up For Growth, a nonprofit dedicated to ending the housing shortage. And over the past decade, Phoenix, Boise, and Salt Lake City have dropped 5 percent from what they needed that year, the report said.

“Someone compared it to a game of musical chairs, you know, you’re out of the question,” Berg said. “They are not left out because I am a slow runner. They are excluded because there are not enough chairs.

Although federal rental assistance is available, mostly through the Housing Choice Voucher program, the program cannot provide help to everyone who needs it, Berg said. Under the program, the federal government pays part or all of the rent for low-income families, people with disabilities, and the elderly.

“It is funded so that about a quarter of the people who need help actually get the help. And the other three-quarters go on a waiting list and sometimes wait years to get into the program, “Berg said.

Excluding

The best solution, Berg said, is for communities to build modest rental housing. But local zoning laws can pose significant obstacles to this. “There is a phenomenon called NIMBYism, not in my backyard, where people who have already bought a house, a single family house, often don’t want their neighborhood to change” with the addition of smaller and more affordable houses, he said Fairweather.

When zoning restricts high-density new construction, this can drive up house and rental prices and drive some people out of housing entirely. A 2020 Government Accountability Office study found that, all other things being equal, a $ 100 increase in average rent was associated with a 9% increase in the estimated homeless rate in the United States.

The big picture

Housing in America has typically been used as a way to create wealth. But in a housing crisis where some can’t find a home on their own or not at all, there are also financial and socioeconomic generational consequences, experts say.

“If housing is the main source of wealth and is passed down from generation to generation, then it really matters whether or not your grandparents were in a position to buy back a home, let’s say, like in the 1950s or 1960s before Civil Rights. Act has been passed, ”Fairweather said.

These consequences for generational wealth can also exacerbate the racial wealth gap, notes a Brookings study from 2021.

“Home ownership is often seen as the gateway to the American dream and the gateway to intergenerational wealth. However, this path is often less feasible for black Americans with a 46.4 percent home ownership rate than 75.8 percent for white households, “the study notes.” Homes in predominantly black neighborhoods across the country. country are valued at $ 48,000 less than predominantly white neighborhoods for a cumulative equity loss of approximately $ 156 billion. These are factors that significantly contribute to the racial wealth gap. ”

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