“Owning a home is a keystone of wealth – both financial affluence and emotional security.”
-Suze Orman
Affordable housing has become a buzz phrase all over this country mostly because there is so little of it. Turn on the TV and you can’t help but hear about some of the effects of the high cost of housing. In some of our smaller mountain towns, residents can’t get their mail, either delivered or picked up because the post office can’t find workers that can afford to live in those towns because of the high cost of renting or purchasing a home. Teachers around the country are having the same problem. Lots of jobs for them but they can’t afford the rent or mortgage.
Wage growth in the US has averaged 6.2% per year from 1960 to 20231. During that same period, housing prices have averaged annual increases of 4.25%2. So, why has it become so unaffordable for so many people to buy a home? The answer lies in disposable income. Disposable family income rose steadily from 1960 to 1981. It actually dropped in the early 1980’s due to the high inflation going on. Interestingly enough, disposable income has remained at the same level since. Beginning in 1970 consumer debt began to skyrocket. Prior to that credit cards were a luxury and installment debt was primarily used for auto purchases. Even though wages were rising, consumer debt was eating up those increases as fast as they were coming. Come into the 2000’s and add another level of debt to the consumer: student loan debt.
In 1975 when Deb and I married, we had a small auto loan. That was it. We had more discretionary income available to us that we could apply towards housing. Now it’s not unusual for newlyweds to enter into life with each person carrying an auto loan, credit card debt as well as student loan debt. They have so much money already committed to debt payments they have little flexibility in what they can spend on housing.
On the supply side, there are also headwinds adding to this unaffordable housing. Over the past decade while interest rates have been at historically low levels, many homeowners have refinanced their mortgages at rates around 3% to 4%, and new homebuyers have gotten their mortgages in the same range. Unless you absolutely had to, why would you sell your current home with a 3% mortgage to buy another one and must get a new mortgage at 6% or better? You wouldn’t. And builders aren’t building because there is a smaller pool of potential buyers and the higher costs of materials and labor cuts into their profit margins. So even if you want a house and can afford a house, it’s tough to find a house.
I don’t claim to have a solution and I’m pretty sure there isn’t one solution to this problem, but there are agencies and non-profits like the Housing Resources of Western Colorado that are looking at different solutions and options. I think that the supply and demand forces will eventually bring some balance back into the housing market as sales decline, prices should stabilize and likely move lower and hopefully wages will increase some to close the affordability gap. It’s also likely that the size of new homes being built could decrease, so instead of that starter home of 1,200 square feet that we are used to, starter homes may come in at 950 to 1,000 square feet. It’s possible that we could see a 35-year mortgage product.
The dream of home ownership still burns in the hearts of people in our country and I’m sure that the forces of capitalism, along with the help of non-profits and local government agencies, people will still be able to realize that dream.
Sources:
1https://tradingeconomics.com/united-states/wage-growth#:~:text=Wage%20Growth%20in%20the%20United,percent%20in%20March%20of%202009
2https://www.in2013dollars.com/Housing/price-inflation
RELATED ARTICLE: “A Disappearing Dream” posted January 25, 2023
These are the opinions of Legacy Wealth Management, LLC and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Mike Berry is a Registered Representative offering securities through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Legacy Wealth Management, LLC and Cambridge are not affiliated. Cambridge does not offer tax advice. Copyright ©2023 Mike Berry. All Rights reserved. Commercial copying, duplication or reproduction is prohibited.
