A crisis of affordability

That's how Zillow described the state of the US housing market in a recent report.  I've written many times before about the parlous state of that market.  This report reinforces what I've been saying.

Over the past roughly two decades, incomes for the lowest-earning Americans have barely grown at all, but housing costs have grown a lot – particularly among entry and mid-level homes.

On the mortgage side, low-income households spend more of their income on a mortgage, even on a less-expensive home, compared to the highest-income households purchasing a high-end home. And the gap is widening as income growth at the top stays strong but is flat at the bottom. At the end of 2012, low-income households purchasing a low-end home spent 10 percentage points more of their income on a mortgage than high-income people purchasing a high-end home. By midway through 2014, the gap had widened to 14 percentage points.

On the rental side, because rents have been rising steadily for years without much income growth for many Americans, the annual salary needed today to get the share of income spent on rent back to historic levels in most markets would represent a huge raise for most workers.

In the San Jose area, for example – the epicenter of booming Silicon Valley – the current median income is $99,897 per year, almost double the U.S. average. But even with that healthy paycheck, San Jose renters can still expect to pay 41 percent of their monthly income on the area’s median rent, up from 26 percent historically. To get that share of income back to historic levels in the San Jose area, the median renter renting the median apartment would need to make $158,283 per year, a hypothetical raise of more than 58 percent. We’re guessing most bosses, even bosses at the area’s famously generous tech companies, would laugh at that kind of raise request.

And San Jose isn’t alone. Even in a relatively more affordable market like Chicago, where rents consume “only” 31 percent of monthly income, the typical renter would need an almost 23.6 percent raise – from $62,935 currently to $77,784 – to get that share back down to historic levels of 25 percent.

The average raise needed to get the share of income spent on rent back to historic norms (across all markets where the current share needed is higher than the historic share) is approximately 21 percent.

But increasingly, even as homeowners enjoy a significant housing affordability advantage over renters, even they aren’t immune to mounting affordability problems. In a number of large, fast-growing metro markets, the share of income needed to afford a mortgage today is actually higher than it has been historically, bucking the national trend.

. . .

Finally, perhaps the most worrisome housing affordability problem we’ve noticed is the fact that ... home values have increased sharply in the very same metro areas that offer a path to a prosperous future – and incomes have not kept up. In the late 1990s, the average home value in the best places for socio-economic mobility was about 56.1 percent higher than home values in the places where getting ahead was most difficult. Today, the gap has almost tripled, to 147.3 percent.

This shows that it’s harder than ever for kids who grew up in the country’s poorest households to live in the places where they’re most likely to succeed. Getting ahead and improving your socio-economic status is at the very heart of the American Dream. We already know that high rents and growing housing costs are hitting low-income people hardest, and it’s clear the housing affordability crisis on the coasts is going to be more and more of a barrier to their upward social mobility.

There's more at the link.

This has really worrying implications for Americans approaching retirement age, who are planning to sell their big, expensive homes at current property values and use that money to fund at least part of their retirement.  What if there are few buyers available who can qualify for a mortgage sufficiently large to pay their asking price?  Are they prepared to lower their price so that buyers can get financing for it?  Can they afford to do that, without jeopardizing their retirement plans?

The value of an asset is ultimately what someone else is willing or able to pay for it.  If you're relying on the value of your asset(s) to fund future needs, you may want to take a long, hard look at your strategy, and your plans - and possibly begin working on alternatives.  I don't see things improving for some considerable time.

(That's one reason why Miss D. and I bought the house we did.  We're paying about the same on a 15-year mortgage in Texas every month that we were paying in rent on a much smaller and less comfortable duplex in Nashville.  We're also paying in extra every month to reduce the capital balance owed.  With luck and hard work, we'll have paid for our house in ten to twelve years, and own it free and clear.  That's the way housing was supposed to work, traditionally . . . but thanks to the financialization of almost everything and every market, housing's gone the same way.  People are spending far more than they can afford on their homes, whether buying or renting.  Sooner or later, that's going to bite.)

Peter