Home Buyers Need 80% More Income

JOSH BOAK Newsm ax com

10–12 minutes

Lori Shelton can't fathom ever having the money to buy a home — and that's a major reason why so many voters feel down on the economy ahead of this year's presidential election.

Shelton, 67, drives an Uber to help pay rent in Aurora, Colorado. An advance on her pay covered her apartment's security deposit. But it also cut into her next paycheck, leaving her bank account dangerously low when the rent was due — a cycle that never seems to end.

“I'm always one step behind,” said Shelton, her voice choking up. “It’s a nightmare, it’s a freaking nightmare right now.”

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“Even as incomes are going up and the economy is doing well and inflation is coming down, people can’t buy homes. That’s like the biggest problem for B iden because it’s not one that he can solve.”

— Daryl Fairweather, Chief Economist, Redfin

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The United States is slogging through a housing affordability crisis that was decades in the making. At the root of this problem: America failed to build enough homes for its growing population. The shortage strikes at the heart of the American dream of homeownership — dampening President Joe Bid en's assurances that the U.S. economy is strong and underscoring the degree to which Repub ican Donald Tru mp, the former president and presumptive GOP nominee for 2024, has largely overlooked the shortage.

Home shoppers today need to make more than $106,000 to comfortably afford a home, a new Zillow analysis finds. That is 80% more than in January 2020, when Donald Tru mp was in office as president, showing how significantly the math has changed for hopeful buyers under the administration of President Joe Bi den.

In 2020, a household earning $59,000 annually could comfortably afford the monthly mortgage on a typical U.S. home, spending no more than 30% of its income with a 10% down payment. That was below the U.S. median income of about $66,000, meaning more than half of American households had the financial means to afford homeownership.

Now, amid 30-year mortgages at 6.74% and sticky inflation, the roughly $106,500 needed to comfortably afford a typical home is well above what a typical U.S. household earns each year, estimated at about $81,000.

“Housing costs have soared over the past four years as drastic hikes in home prices, mortgage rates and rent growth far outpaced wage gains,” said Orphe Divounguy, a senior economist at Zillow. “Buyers are getting creative to make a purchase pencil out, and long-distance movers are targeting less expensive and less competitive metros. Mortgage rates easing down has helped some, but the key to improving affordability long term is to build more homes.”

Renters Shell Out Cash

The lack of housing has caused a record number of renters to devote an excessive amount of income to housing, according to a Harvard University analysis. Not enough homes are for sale or being built, keeping prices elevated. Average mortgage rates have more than doubled and further worsened affordability.

In fact, the Census Bureau reported that homeownership fell slightly at the end of last year in an otherwise solid economy. If it wasn’t for shelter costs, inflation — Bid en’s most pronounced economic problem — would be running at a healthy and stable 1.8%. Instead, it's hovering around 3.2%.

Administration officials are confident that shelter inflation will soon cool, but the damage across several years is apparent to advocates and economists.

“I’ve been doing housing work for 30 years — the housing affordability challenge is the worst I've ever seen in my career,” said Shaun Donovan, a former secretary of Housing and Urban Development in the Obam a years who now leads the nonprofit Enterprise Community Partners.

Donovan noted that this is an increasingly bipartisan challenge that could bring the political parties together. Expensive housing was once the domain of Dem ocratic areas such as New York City and San Francisco. It's now moved into Re publican states as places such as Boise, Idaho, grapple with higher prices.

“It is a first-tier issue almost everywhere,” he said. “And that is changing the national politics around it in a way that I think is quite different than I’ve ever seen.”

Mortgage Rates & The Presidency

Mark Zandi, chief economist at Moody’s Analytics, said that the outcome of the November election could ultimately depend on the path of 30-year mortgage rates.

Rates currently average about 6.74%. If they dropped closer to 6%, the odds of a Bide n victory would increase. But rates moving near 8% might enable Tru mp to prevail, Zandi said.

“Given the current housing affordability crisis, higher rates will make owning a home completely out of reach for nearly all potential first-time homebuyers,” he said. “Since homeownership is a key part of the American dream, if it appears unattainable, this will deeply impact voters’ sense of the economy.”

Bid en, a De mocrat, acknowledged the pain many are feeling in his State of the Union address earlier this month and in his budget proposal released on Monday.

The president wants to fund the building and preservation of 2 million housing units — a meaningful sum, but not enough to solve the shortage. He also proposed a tax credit worth up to $10,000 to homebuyers. Over the past three years, he has increased rental assistance to 100,000 households.

“The bottom line is we have to build, build, build,” Bi den said Monday in a speech to the National League of Cities. “That’s how we bring down housing costs for good.”

Rapidly climbing home prices were also a festering problem under Trum p, who first achieved celebrity status as a real estate developer. While president, Tru mp called for limiting construction in the suburbs. He claimed during the 2020 election that B iden's policies to spur building and affordability would “destroy your neighborhood.”

During the 2018 to 2020 years of Tru mp's presidency, the country’s housing shortage surged 52% to 3.8 million units, according to the mortgage company Freddie Mac.

The Associated Press contacted Tr ump's campaign for his policy plans but did not get a response. The America First Policy Institute, a think tank promoting Trum p's vision, said the key is to cut government borrowing to reduce mortgage rates. The former president has pledged to reduce deficits, but an analysis by the Committee for a Responsible Federal Budget shows that his policies in office will have likely added more than $8 trillion to the national debt.

“The best way for us to improve access to homeownership for young people is to get interest rates back down, not to provide subsidies that cause housing unaffordability to worsen,” said Mike Faulkender, chief economist at the institute.

Lower rates might play well with voters, but most economists say they would at best offer temporary financial relief. Purchase prices would likely adjust upward in response to greater demand from falling rates.

'People Can't Buy Homes'

Construction, the more enduring solution, would take years to achieve and require new rules by states and cities. The administration is trying to incentivize zoning changes, but the major choices are outside the White House's control.

“Even as incomes are going up and the economy is doing well and inflation is coming down, people can’t buy homes,” said Daryl Fairweather, chief economist at the brokerage Redfin. “That’s like the biggest problem for Bi den because it’s not one that he can solve.”

The general rule of thumb is that people should pay no more than 30% of their income on rent or a mortgage. A typical household looking to buy a home would have to devote 41% of its income to mortgage payments, according to Redfin.

There are far-reaching economic risks because of this. High housing costs can lead people to cut back spending elsewhere. Advocates said it enables landlords to neglect their properties since there is always a ready tenant.

Evictions can worsen health and educational outcomes for children and exact an even wider cost on society, said Zach Neumann, a Denver-based lawyer who provides more than $30 million annually in rental assistance through the nonprofit Community Economic Defense Project.

The cumulative costs of evicting poorer renters are "$20,000 to $30,000 a year when you include shelter nights and emergency room visits,” Neumann said. “It’s really overwhelming when you think about the total numbers and these folks are fighting to have a roof over their heads.”

While there is bipartisan agreement on the need for more housing, there has yet to be a significant plan that has passed the House and Senate. Bi den has proposed housing aid throughout his administration that never materialized.

“Had Congress passed some of the investments that the president has called for since the beginning of the administration, had they done that three years ago, as he was advocating, we’d have affordable units coming online right now," said Daniel Hornung, deputy director of the White House National Economic Council.

Not Enough Housing Stock

But Mark Calabria, who was director of the Federal Housing Finance Agency during the Trum p administration, said that many of the federal tools to increase housing such as the Low-Income Housing Tax Credit could further push up demand without adding enough construction.

“My worry would be we’ve done a number of things that increased demand when the problem is supply,” said Calabria, now an adviser with the libertarian Cato Institute.

But for renters such as Lori Shelton in Colorado, the debate about how to add housing supply is cold comfort when she owes rent now. She's previously dealt with the threat of eviction and late fees. She gets some rent money from her son, but she has also relied at times on her church to cover the $2,399 a month.

Same thought I had, NE.

Driving UBER is a poor choice. Stats show they only make $2/hour after expenses.

I grow weary of the "woe is me" articles about housing as click bait.

Buyers and realtors were drunk with easy money and easy deals for the past several years. Get over it. It gone.

Would SOMEONE please start talking about shopping for a decent starter home or fixer for a young family at today's income and rates. Not everyone needs a $450K 5 bed, 3 bath executive home. In MY area that's a huge executive home in a fancy neighborhood.

(I know I know that could be a shack in some cities. OK, so you can't afford to live in that town.)

The only thing constant in the business world is CHANGE. So adapt.

BRAD

There is really no solution to this problem.

The reasons are because of the nature of some people and government's hubris in their idea they can "fix it".

Regarding the nature of people, I have noticed that many people will simply make the decision that they are willing to pay more for a place that they want. They want a larger place, a newer place, a place with amenities, a place in a "good" school district, a place in a nice area, they WILL pay more. Those "guidelines" about 25 percent of their income for housing payment are garbage, even if the percentage does economically make sense, People don't care about that, they want what they want.

Then there are the "entitled " types who think simply because they exist that they should automatically have the same things as the people who are willing to work harder or longer or smarter and are willing to sacrifice to get what they want. The liberals and the government LOVE these types and the press puts them on the front page and uses them to show how greedy the conservatives are. The government, especially the liberals, thinking that "THEY" are the solution point fingers at the conservatives and dream up one plan after another to "FIX" the problem, all of which never work because of the nature of the entitled people. They ignore the reality of the truth that "THERE IS NO FREE LUNCH".

Instead of telling these entitled people that :you can't live here" because you can't afford it, they insist that others make it happen and they are quick to take our money for their latest program to make it happen, which, of course, fails.

In the meantime, there are many, many houses sitting empty in thousands of places that can be had very cheaply and would do.

The entitled people don't want these houses though. They want the large, new ones on the beach in a beautiful climate. They demand it. The liberals politicians and those types cater to them.

The solution to this problem is to get the government out of the equation and let entrepreneurs solve it. Quit simping to the entitled crowd. Let nature have it's way.

The entitlement crowd exists because the government and the liberals cater to them. Unfortunately,there is no chance that this will not continue, at least in this country.

In 30 years, everyone will be wishing they could buy houses at 2024 prices. It's like planting a tree: the best time to buy was 30 years ago, but the next best time is today.

$102,000 income to "afford a home" is a joke.

There are dozens of houses in the $200,000 - $250,000 range in my town for sale right now. Let's take a $225,000 home. 3 bed, 2 bath, 2 car garage, 1250 sq ft. With 3% down, that's only a meager $6750 down payment. Easy cheesy to get that with a little saving discipline and/or putting in a few months of overtime. At 6.7% rate, 30 years, P&I is $1450. That's well within the budget of a $70,000/year household income, which is an absolutely easy to achieve goal for a married couple.

Stories like this one are clickbait to stir up the folks who refuse to do basic math.

67 and driving for Uber?!? That reminds me of the joke about the guy whose boat capsized in the ocean, and every rescue boat that came by, the guy said, "No, God will save me." When the guy finally perished, he got to ask God why He didn't save him. God replied, " I sent three boats!"

67 years old, could have bought a fixer upper for less than a cheap used car in many major cities several times. Early 1980s and 2009-2013 for sure. My four little houses had all had renters living in them only months before I bought them. So, though not great, they were approximately liveable. When God sends opportunity, ya gotta seize it! My daughter saw me looking at houses in 2012; she and her husband decided to buy a bank foreclosure. They were 20 and 21 years old. House has tripled in value since then, they still live there. Not the greatest neighborhood, but, they, and several other neighbors work at it to keep the neighborhood strong. The new neighbors that move in continue to build those relationships.

I have noticed some articles regarding how builders are adapting by making smaller homes, but only by 200sf smaller.

Richard is right - it all goes back to what they want.

Cellphone, internet, and streaming bills are an expense their parents did not have when starting out, add the high cost of even used cars, and eating out as normal, throw on student loans...their CHOICES are not allowing them to buy a home.

Absorption rate has been negative in housing for decades. There are things the government can do in fact to help ease this issue.

Government can ease zoning requirements to allow for more smaller homes and ADUs. But that means taking power away from local government.

The government can help by providing larger developers and builders more incentive to build bigger projects in specific market places.

The government can ignore the NIMBY mind set.

The government can do all these things, but will doing any of these things get you votes right away? Nope, beating up on housing providers will allow you to buy votes instead. Do I think this is going to change any time soon?

All the new construction I see are all 2000sq ft and up. No one builds 800sq ft starter homes any more. (2bed 1 bath). The developers make more money off the Mc mansions. So there is no incentive to build small houses people can afford. They would rather build appts or luxury condos.