Because it is becoming even more difficult to keep a roof over your head

Rents have risen by double-digit percentages in some cities. Meanwhile, buying a home is as unsustainable as it has been since the mid-1980s. Mortgage rates have surpassed 6% and house prices remain just off the all-time highs reached in recent months, putting many potential home buyers out of business.

And while there are some signs of cooling in the market, it doesn’t look like there will be much relief in sight for homebuyers.

A year ago, a buyer who put 20% off a single-family home with an average price of $ 363,800 and financed the rest with a mortgage rate of 2.88% – the average at the time – received an installment. monthly of $ 1,208.

Today, a homeowner who buys the house at an average price, which is now $ 396,300, with a mortgage at the current average of 6.29% would pay $ 1,960 a month in principal and interest. That’s $ 752 more every month.
With inflation pushing most household spending higher, few potential homebuyers can afford those more expensive monthly payments.

Over the past five years, the median price of a home has risen by 60 percent while median income has risen by less than 15 percent, said Andy Walden, vice president of business research at Black Knight, a mortgage database company.

“House prices are vastly out of proportion to income levels,” Walden said.

Americans are now spending more than 35% of their median income on monthly principal and interest payments on that newly purchased home at an average price. Historically, Americans have spent nearly 25% of median income on payments.

To get back to that level, Walden said, a combination of these things would have to happen: a person’s income would have to rise 40 percent, mortgage rates would have to be halved, or there should be a 30 percent drop in the average home price. .

But none of these things are likely to happen anytime soon.

How did we get here?

Part of the reason housing has become so expensive is that record mortgage rates seen during the Covid-19 pandemic have increased demand for homes, which in turn has pushed prices higher. With more buyers competing for a limited pool of homes for sale, bidding wars and all-cash deals have become commonplace, driving prices to record highs.

Now buyers are struggling with a combination of high house prices and rising mortgage rates.

“The sore point came when rates returned to the 6% level,” Walden said.

The other side of the problem is supply. Eager buyers were faced with a nationwide shortage of homes that took a long time, creating a mismatch between supply and demand that pushed home prices higher.

The United States has fallen behind by about 5.5 million housing units over the past 20 years as builders have failed to keep up with historic building trends, according to the National Association of Realtors. If you add, among other things, the destruction of property due to demolitions or natural disasters, the total deficit could be closer to 6.8 million during that period.
Should I rent or buy a house?

The drive shortage is so profound that it would take more than a decade to catch up, according to NAR.

But even if more houses and apartments are built, it doesn’t matter if people can’t afford them.

In April 2021, a family had to earn about $ 80,000 annually to afford mid-priced home payments with a modest 3.5% down payment. A year later, the required income was $ 108,000. This cost increase means that an estimated 4 million tenant families who could have bought the home at an average price last year could no longer do so twelve months later, according to Harvard University’s Joint Center for Housing Studies.
Without a home to buy, renters remain, pushing rents further into an already tight market.
Sun Belt cities, such as Phoenix and Austin, saw some of the biggest increases in housing costs during the pandemic. In Miami, the price of a home has risen 33% from a year ago and rents have increased 17% from last year, according to Realtor.com. But the economic accessibility crisis is occurring at the national level, in all regions of the country.
As tenants reach the limit of what they can afford to pay each month, home ownership becomes increasingly out of reach as they struggle to save for a down payment. This widens the wealth gap and blocks the inequalities between those who benefit financially from home ownership and those who don’t. The racial home ownership gap is also widening, in which 72 percent of white Americans own homes while only 43 percent of black Americans own a home, according to NAR.

So what happens next?

There are clear signs of cooling in the housing market. Home sales have fallen for seven consecutive months as rising costs of buying and financing a home push more people out of the housing market. Typically, when demand runs out, prices will drop and mortgage rates will eventually stabilize.

For now, however, mortgage rates are likely to rise even more as the Federal Reserve continues to raise interest rates in its battle to fight inflation.

The Fed does not directly fix the rate that borrowers pay on mortgages. Instead, mortgage rates tend to follow the 10-year US Treasury yield. As investors anticipate Fed rate hikes, they often sell government bonds, which raises yields and, with it, mortgage rates.

How much house can I afford?

Most housing experts say building a steady supply of new homes at moderate prices is needed to solve the affordability crisis. But since those homes are not as profitable to builders as larger and more expensive homes, it will take a concerted effort from both the public and private sectors.

In May, the Biden administration announced a housing supply action plan to close the affordability gap and alleviate housing costs. The plan aims to strengthen the supply of affordable housing by improving existing federal funding and incentivizing areas to reform zoning and land use policies to build cheaper housing. It also requires home builders to adopt more efficient construction methods.

But none of this is a quick fix and partly requires congressional action.

Separately, the Federal Housing Finance Administration, which oversees mortgage giants Fannie Mae and Freddie Mac, announced this summer plans to expand home financing options for buyers, especially those of color, to bridge the gap. racial ownership of homes. These programs include down payment assistance, lower mortgage insurance premiums, and a credit reporting system that takes into account rental payment history.
Some of these ideas, including new zero-installment loans with no closing costs for buyers in specific Black or Hispanic neighborhoods, are already in place.
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