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Home sweet home.
Whether you dream of owning a cabin in the woods, a bungalow on the beach, a condo in
the historic downtown district or a ranch style house in suburbia, everyone wants somewhere
nice to live.
However recently, there’s been a lot of talk in the media about how the average American
worker, especially the younger generations, have been priced out of the US housing market
and will never be able to afford a median priced home.
Is this true?
We are by no means financial or real estate experts, but let’s discuss some reasons
why you may never be able to buy a house.
A report released in September 2019 from a property data firm analyzed 498 counties across
the US.
They came to the conclusion that in 371 of those counties or 74% of them, average wage
earners could not afford to buy a median-priced home as of the third quarter of the year.
The number of unaffordable counties has risen 6% from 6 months ago when their previous report
showed that 71% of housing markets were exorbitant for average workers.
This report assumed that a potential homeowner is putting down 3% when they purchase the
property--which is a fairly low down payment, much lower than the traditional 20% down payment
wanted by most private lenders.
Affordability was calculated by determining the amount of income needed to make monthly
mortgage payments, property taxes and insurance premiums.
The final total was compared to the average weekly wage data from the Bureau of Labor
Statistics.
There were only 127 counties out of the 498 counties where a worker earning an average
salary could afford to make the housing payments for a median-priced home in their area.
Metro areas that were considered affordable by the analysis included Houston, Detroit
and Philadelphia.
Furthermore, the report discusses how home prices are rising and will continue to rise
for the foreseeable future.
Granted, a report from a single company may not tell the entire story, but a variety of
surveys across the board paint a similar picture, it’s become difficult for the average American
worker to afford to purchase a house, even when purchasing as a two income family.
The housing market is prohibitive for several different reasons.
Firstly, in general around the country and especially in popular metro areas, there are
a lack of homes for sale.
Older generations are choosing to hang on to their current homes and age in place.
When mortgages rates were lower, many homeowners took advantage and refinanced their loans,
so currently if they chose to move, they would end up paying more for the same mortgage,
on top of paying more for a move-up home.
Even sellers who want to downsize are currently moving into a pricier market.
While consumer confidence is currently high, many Americans feel anxious and uncertain
about the future, so they are less likely to make huge lifestyle changes such as selling
a house and moving unless they have to.
During the housing bust of the late 2000’s, big commercial property companies began buying
thousands of homes out of foreclosure.
In many markets, these homes were not flipped and resold, but have been entered into the
rental market.
Both long term and vacation rental demands have been strong for the past several years,
creating solid investment opportunities while low interest rates have made other investments
less appealing to investors.
Also, in recent years there has been technology created that facilitates buying homes online.
As a result, investors have continued to pour more funds in purchasing properties.
Even in 2018, big private-equity firms, real-estate speculators and others that buy properties
comprised more than 11% of U.S. home purchasers.
Central to this discussion is the fact that investors purchased one in five homes in the
bottom third of the price range of the national housing market in 2018.
Those starter and fixer upper smaller homes are exactly the types of properties in first
buyers price range.
Furthermore, after the recession in the late 2000’s, home-building activity was slow
to rebound.
When new homes were built, builders mostly concentrated in the most expensive tier of
the market for single-family homes.
All of this adds up to mean that that there are simply fewer houses on the market and
prices can be driven up by buyers bidding on homes.
Young families looking to purchase a starter home, may be competing against other first
time buyers as well as a company or house flippers.
That means in hot markets, there are often bidding wars over homes.
Sellers may have several buyers to pick from and may even opt for a purchaser who can meet
their specific demands such as paying in cash instead of a traditional mortgage.
Aside from the dearth of homes, especially starter homes for sale, achieving homeownership
is hard because wages are not keeping pace with the appreciation in home cost.
A study in the spring of 2019 looked at the salary needed to own a home in the 15 largest
cities in the US.
They used 5 metrics: home value, down payment, property tax rate, homeowners insurance and
other monthly debt payments to model the salary needed to afford home payments.
Per their study, San Francisco was the most expensive city to purchase property in with
a median home value of $1,104,100.
Assuming that you could put down a 20% down payment and wouldn’t want to take on a lot
of debt, the salary to afford payments for such a house in San Francisco is an annual
household income of $172,153.
Per the US Census Bureau, the U.S. median household income for 2018 was $61,937.
The median income for California was slightly higher at $75,277.
A study this past spring calculated the median income in San Francisco as approximately $96,265
for households and $74,841 for individuals.
That’s still over $70,000 shy of the needed annual income to afford a median home in San
Francisco.
Roughly 29.5% of US households, or 37,665,335 households made $100,000 or a six-figure income
in 2018.
Only the top 10% of US households made $178,793.00 or more in 2018.
Admittedly, the housing market in San Francisco is an extreme example.
It’s astronomical, fueled by limited property supply and a relatively small percentage of
well paid workers at tech companies.
However, variations of the same scenario where average worker wages fall significantly short
of average home payments cost is repeated in many areas through the rest of the US.
The salary needed to afford housing payments is just the tip of the iceberg.
The study looking at salary needed to own a home in the 15 largest cities in the US
assumed a high credit score, a 20% down payment and what the personal obligations a potential
purchaser might have such as student loan debt were moderate.
Often, it’s hard for a first time buyer to stockpile 20% of the house cost for a downpayment.
However first time purchasers have several ways of getting around having to pay this
large lump sum.
Some private lenders will accept a much lower down payment if the purchaser gets private
mortgage insurance or PMI, which basically allows the lender to recoup their loss if
the purchaser defaults on their loan.
However, PMI can be a significant cost, ranging as high as 1% of buyer’s total loan value
per month.
For example, a 1% PMI on a $200,000 mortgage would cost a buyer $200 per month, which can
add up over the years.
Mortgages from government-backed lenders, such as an FHA loan, don’t charge PMI.
However, they do still charge separate mortgage insurance.
First time purchasers can also opt for low down payment mortgages through groups they
belong to such as VA loans, which are backed by the Department of Veterans Affairs, and
USDA loans, which are backed by the Department of Agriculture.
Both can offer 0% down payment options for borrowers who qualify.
There are also FHA loans which are backed by the Federal Housing Administration and
allow down payments as low as 3.5%.
However, in March of 2019 the FHA tightened its rules for insuring higher-risk mortgages.
After a surge of mortgages made to purchasers which lowered the average credit scores for
borrowing purchasers to 670, the FHA became concerned that backing higher-risk loans could
potentially lead to defaults, depleting cash reserves the federal agency uses to insure
mortgages.
As a result the FHA reintroduced the manual underwriting requirements it removed in 2016,
so that mortgage applicants with weaker credit scores and higher debt burdens will get closer
scrutiny.
While the rule will only affect between 40,000 to 50,000 borrowers a year, it is likely to
heavily apply to first time buyers.
Some first time buyers also take out conventional loans to meet 20% down payment costs.
However to do so you must have good credit.
So assuming you have good credit, including a low debt to credit ratio--yes that does
include student loans, have an annual household income well over 6 figures, can come up with
a 20% down payment for your desired house and potentially outbid other purchasers, you
can purchase a house in many locations in America.
Why all the media attention or fuss over why average American workers can’t purchase
a home?
Maybe the idea of owning a home doesn’t appeal to you.
You have plans to live overseas, live a minimalist, non material lifestyle, ect.
That’s great, no one is saying that you must purchase a home to be considered an adult
or a productive member of society.
However, to many people owning a home is a life goal, an important tenet of the American
Dream, and vital for long-term economic security.
Whether home ownership is a personal goal for you or not, you should be aware of the
factors affecting the housing market.
This is part of a much larger conversation about income inequality, corporate greed,
generational expectations, student loan debt and even where America’s future financial
stability lies.
No matter why you made the decision to never own a home, or more likely had the decision
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Do you have plans to purchase a house?
How were you able to make it work?
Tell us your secrets in the comments!
Now go watch our other video the “Most Expensive Things in the World!”
Thanks for watching, and, as always, don’t forget to like, share, and subscribe.
See you next time!