Last year, the median home price jumped more than 15 percent, according to data collected from the Federal Reserve in St. Louis. And renters are feeling a similar pain: On average, rents in May were up 15 percent from a year earlier, according to Redfin, but in some cities, like Austin, Nashville or Seattle, the rise was more than double that.
All this makes finding and providing shelter increasingly difficult. While this appears to have worsened in recent months, home prices have continued to rise steadily for a decade, making affordable home ownership and rentals out of the reach of many.
Here’s a look at some of the factors that contribute to a difficult housing market, and who are hit hardest.
Inflation and mortgage rates
In the first quarter of 2021, the median home price in the United States was $369,800, according to the Federal Reserve Board in St. Louis. By the first quarter of 2022, the median home price had jumped to $423,600.
With inflation soaring — with the Consumer Price Index rising 9 percent year-on-year in June, the highest in more than 40 years — the Fed has begun raising interest rates. This has led to higher mortgage rates, which are caused by inflation and interest rates, said Daryl Fairweather, chief economist at real estate brokerage Redfin. “Because inflation is increasing, that means that anyone who is lending money knows that they will never get back the true value unless they charge a higher fee. [mortgage] The price because money in the future will not be equal to money today when you have inflation.”
The result was stark and costly increases. According to Freddie Mac, the average 30-year fixed rate mortgage rate has nearly doubled since this time last year, jumping from 2.8% in June 2021 to 5.52% in June of this year.
This has led to a slight decrease in the demand for homes, and thus their prices. But what people can save in the purchase price is wiped out when mortgage rates are taken into account, which at their current level can add nearly $100,000 to the $200,000 mortgage cost over 30 years.
While inflation is a recent factor, home prices have been on the rise since the bottom of the 2012 housing crash.
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 household that earns between $75,000 and $100,000 a year can afford about half of active home listings.
In 2020, the median household income was $67,521, according to census data analyzed by the Federal Reserve. For people in this income bracket, options dwindled quickly — they could afford only 34 percent of the available housing stock. According to the report, “35% of whites, 25% of Hispanics, and only 20% of black Americans have incomes above $100,000.”
Amid skyrocketing prices, many potential home buyers are left with two primary choices: rent wherever they are or move elsewhere.
Buying a home in an affordable area may seem attractive, but it may be unacceptable for those who need to live in their workplace. Buying a home in a different market creates its own ripple effects.
Fairweather said that if a potential home buyer lives in San Francisco, “where the median home price is $1.5 million, and you move to Sacramento where it’s $450,000, that’s a huge savings.” But what happens next is that home prices in Sacramento are going up and the people who live in Sacramento as renters, for example, are facing much more competition. Taxes on their property may also rise. The locals are therefore priced in and have to go again to the next, less expensive metro.”
Even smaller apartments are too expensive for low-income workers, according to the National Coalition on Low-Income Housing. In 2021, a worker would need to earn $24.90 an hour to afford a “modest two-bedroom apartment,” the NLIHC wrote in a recent report. anywhere in the world. The report said that a country that earns a state, federal or local minimum wage for 40 hours a week can currently afford “a modest two-bedroom home at fair market rent.”
“Housing at the lower end of the rental market has consistently risen much faster than earnings at the lower end of the wage market,” said Steve Berg, vice president of programs and policy at the National Alliance to End Homelessness.
The biggest problem with the cost of finding shelter is supply. According to Freddie Mac, the US has a shortfall of 3.8 million units needed to meet current demand.
“The builders haven’t done enough to meet demand,” Fairweather said. “We had fewer homes built in 2010 than in any decade over the 1960s. But net demand has continued to increase, particularly as millennials enter home buying age.”
Washington, D.C., for example, was about 156,000 units less than it needed in 2019, according to a new report by Up For Growth, a nonprofit organization dedicated to ending the housing shortage. Over the past decade, Phoenix, Boise and Salt Lake City have fallen 5 percent of what they needed that year, the report said.
“Someone compared it to a game of musical chairs, you know, you’ve been knocked out,” Berg said. “They are not neglected because they are a slow runner. They are neglected because there are not enough chairs.
While federal rental assistance is available, primarily through the Housing Choice Voucher Program, the program cannot provide assistance to everyone who needs it, Berg said. Under the program, the federal government pays some or all of the rent to low-income families, people with disabilities, and seniors.
“It’s funded so that a quarter of people who need help actually get it. The other three quarters are on a waiting list and sometimes wait years to join the program.
The best solution, Berg said, is for communities to build modest rental housing. But local zoning laws can pose significant barriers to this happening. “There is a phenomenon called NIMBYism, and it’s not in my backyard that people who have already bought a home, a single-family home, often don’t want to change their neighborhood” with the addition of smaller, affordable homes, Fairweather said.
When zoning restricts high-density new construction, it can drive up housing 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 median rent was associated with a 9 percent increase in the estimated homelessness rate in the United States.
The Big Picture
Housing has long been used in America as a means to build wealth. But in a housing crisis where some don’t find housing within their means or at all, there are financial, social and economic consequences for generations as well, experts say.
“If housing is the primary source of wealth and has been passed down from generation to generation, it really matters whether your grandparents were in a position to buy a home again, say, like the 1950s or 1960s before the Civil Rights Act,” Fairweather said.
A 2021 Brookings Institution study suggests that these consequences for generational wealth could also exacerbate the racial wealth gap.
Home ownership is often seen as a gateway to the American Dream and a gateway to intergenerational wealth. However, this path is often less achievable for black Americans who post a home ownership rate of 46.4% compared to 75.8% for white families,” the study notes. Homes in predominantly black neighborhoods across the country are valued at $48,000 less than predominantly white neighborhoods for an estimated cumulative loss of equity of $156 billion. These are significant contributing factors to the racial wealth gap.”