With US housing costs soaring due to increased demand and limited stock, the dream of home ownership or an affordable rental is becoming unreachable for many<\/p>\n\n\n\n
Tell us: have you struggled with the US housing crisis?
In 2021, real estate agents started noticing something strange happening in the US housing market.<\/p>\n\n\n\n
In a single week, veteran realtor Sasha Davis wrote 50 offers for clients hoping to buy a home in Florida.<\/p>\n\n\n\n
\u201cTyping that much was a lot,\u201d she said. \u201cMy hand was struggling. It was tough to even grip after that.\u201d<\/p>\n\n\n\n
But of the 50, just five were accepted, a miserable rate.<\/p>\n\n\n\n
Davis said listings that would normally get five offers were getting 50 or even 100. Several of her clients came in with full cash offers higher than the list price, but still lost out on the home. She recalled one listing where a buyer offered $100,000 over the list price to win the bidding.<\/p>\n\n\n\n
This was a national trend. The typical US home value at the beginning of 2020 was about $230,000, according to Zillow data. Today, it has shot up to more than $330,000.<\/p>\n\n\n\n
But it wasn\u2019t just home prices. Rising housing costs have been devastating for many renters.<\/p>\n\n\n\n
A record number of people are now \u201ccost-burdened\u201d by rent prices, meaning the cost of housing sucks up more than 30% of their income.<\/p>\n\n\n\n
All told, as of 2022, median home prices and rents in America hit all-time highs. This is great for those who already own, as their property values continue to soar. But for many Americans, little is left over for the rising cost of everything else, like food and healthcare \u2013 let alone to save for a house. Ultimately, the dream of home ownership or an affordable rental is becoming unreachable for more and more Americans.<\/p>\n\n\n\n
The perfect storm for record-high home prices
To understand what\u2019s going on, we have to understand how we got here.<\/p>\n\n\n\n
There is no universal rule on what you can afford based on your income, since it\u2019s dependent on location and your financing. But historically, the average home cost about 2.6 times the median income \u2013 a ratio real estate agents often cite as a threshold for affordability. So if your annual household income is $100,000, then this simple formula says you can afford a $260,000 home.<\/p>\n\n\n\n
2005: In the early 2000s, housing prices started to nudge upward. By 2005, the average single-family home was nearly five times higher than the median household income.<\/p>\n\n\n\n
2009: Then the housing bubble burst, causing home prices to plummet nationwide. By 2009, a single-family home cost about 3.6 times the median household income.<\/p>\n\n\n\n
2019: But since then, housing costs have nudged upward. By 2019, a single-family home cost about 4.1 times the area’s median household income.<\/p>\n\n\n\n
2021: The pandemic supercharged housing prices, especially in the Sun Belt and Mountain West regions.<\/p>\n\n\n\n
2022: Nationally, a single-family home now costs a record 5.3 times more than the median household’s income \u2013 double what is considered affordable.<\/p>\n\n\n\n
The simple explanation for why housing prices are so high is that more people want to buy homes, but there aren\u2019t enough on the market. There are several causes of this, according to housing experts.<\/p>\n\n\n\n
Millennials \u2013 born in the 1980s through the mid-1990s \u2013 are driving up demand because they\u2019re now entering the housing market, after years of being delayed in buying their first homes.<\/p>\n\n\n\n
Investors are buying an increasing number of properties, adding to the competition. In 2010, only about 10% of homes were bought by investors; now it\u2019s approximately 20%, according to Redfin data.<\/p>\n\n\n\n
Mortgage interest rates hit a record low during the pandemic, supercharging sales. But today rates are high \u2013 nearly 6.5%, up from less than 3% a few years ago \u2013 and many sellers would rather stay put than risk entering the market for a new home themselves, meaning inventory has cratered.<\/p>\n\n\n\n
Existing homes also aren\u2019t going on the market because baby boomers \u2013 born between the mid-1940s and mid-1960s \u2013 are ageing in place rather than moving into senior living arrangements.<\/p>\n\n\n\n
Despite all this demand, new home construction hasn\u2019t kept up. There was a shortage of about 2.3m homes by the end of 2022, an increase of about 500,000 since 2012, according to a Realtor.com analysis.<\/p>\n\n\n\n
This situation has benefits for some. \u201cIf you are a homeowner, you have access to incredible amounts of equity right now,\u201d said Whitney Airgood-Obrycki, a senior research associate at Harvard University\u2019s Joint Center for Housing Studies.<\/p>\n\n\n\n
But this also means a huge number of potential home buyers are locked out of the market. In most of the country, a household earning the area\u2019s median income is not even close to affording a typical home. Much of the new construction is in the higher end of the market, because that\u2019s where builders can make back their money, Airgood-Obrycki said. That leaves even fewer vacancies for lower- and middle-income households hoping to buy.<\/p>\n\n\n\n
Cost-to-income ratio in select US metropolitan areas
This compares the average cost of a single-family home to the median household income in select US metropolitan areas; the oft-cited threshold for affordability is 2.6, but many areas are moderately higher or significantly higher than that threshold
Search for a metro area\u2026
Source: Joint Center for Housing Studies of Harvard University analysis of data from the National Association of Realtors and Moody’s Analytic Forecasts. Data for 2021 and 2022 were tabulated by the author using Moody’s Analytic forecasts and the 2021 American Community Survey.
Davis, the Florida real estate agent, said she saw people get locked out of buying a home because of the rising costs.<\/p>\n\n\n\n
One example was a client for whom she wrote more than 60 offers. He was a military veteran hoping to buy a home in Florida using benefits from the US Veterans Administration, which allowed him to buy a home without a down payment. In a normal market, she said she probably would have found him something \u2013 but all of those offers were rejected.<\/p>\n\n\n\n
\u201cIt was awful,\u201d Davis said. \u201cI felt tremendous sympathy for the first-time home buyer.\u201d<\/p>\n\n\n\n
These high home prices don\u2019t just affect potential buyers – they also have an effect on the rental market.<\/p>\n\n\n\n
With home sales squeezed, \u201cyou have this golden situation for homeowners\u201d, Airgood-Obrycki said. \u201cBut more people are shut out, and are ending up in higher-income rentals \u2026 This influx of high-income renters is putting pressure on everything else.\u201d<\/p>\n\n\n\n
That is one of several reasons rent costs have also increased. There was already a rental shortage, but the pandemic supercharged some of these trends.<\/p>\n\n\n\n
Millennials who were living with roommates or with family during the pandemic decided they wanted their own space, so they drove up demand on rentals. People working remote jobs wanted more space or different living arrangements.<\/p>\n\n\n\n
And new rentals aren\u2019t being built fast enough to meet all the demand.<\/p>\n\n\n\n
The increasing prices have made it increasingly difficult for households to pay for housing.<\/p>\n\n\n\n
Economists have long believed that households spending more than 30% of their income on rent and utilities are \u201ccost-burdened\u201d. But in most American counties, the average renter has to pay more than that threshold. And for minimum wage workers, there is not a single county in America where an average two-bedroom rental is affordable, according to data from the National Low Income Housing Coalition.<\/p>\n\n\n\n
Rent costs from 2020 to 2023 in US counties
How average rental costs changed from the beginning of 2020 to the beginning of 2023. Some counties only saw small increases, but others saw moderate increases or high increases.
Search for a county\u2026
Source: Zillow Observed Rent Index which measures average rental costs in a given region for the 40th to 60th percentiles of homes and apartment. Note: This table only includes US counties where data is available for 2020 and 2023.<\/p>\n\n\n\n
Poor households are being squeezed from every side. In 2021, as housing costs spiked, households earning less than $30,000 had little money left after paying for rent and utilities \u2013 about $380 a month, compared with nearly $600 two decades ago.<\/p>\n\n\n\n
Meanwhile, there was a 3.4% increase in people who are unsheltered from 2020 to 2022, and a 16% increase in people who are chronically homeless, according to federal data.<\/p>\n\n\n\n
But because many homeowners benefit from rising housing costs, it\u2019s rare to hear American politicians explicitly say that rising housing prices are a problem for everyone else.<\/p>\n\n\n\n
\u201cThey\u2019re really worried about the price of gasoline and the price of eggs going up,\u201d said Jenny Schuetz, a senior fellow at the Brookings Institution. \u201cBut [Federal Reserve chairman] Jay Powell and Biden aren\u2019t saying it\u2019s a problem that housing prices are going up.\u201d<\/p>\n\n\n\n
The widening gap of home ownership \u2013 and wealth
The quintessential American success story has long involved home ownership, and for several generations it has been a reliable way to build wealth. But that\u2019s turned into almost an expectation that home values should increase at about 6% a year. In local elections, homeowners often vote to preserve home values, blocking new building projects and zoning reforms that would allow for more affordable housing.<\/p>\n\n\n\n
\u201cThis is a giant constituency of voters who believe housing prices must always increase over time,\u201d said Schuetz, who recently published a book, Fixer-Upper, about how to fix the housing affordability crisis. \u201cWe\u2019re used to it going up faster than inflation, and sometimes faster than the stock market \u2026 No one wants to say publicly that housing prices should only go up 2 to 3% a year.\u201d<\/p>\n\n\n\n
Even if home prices increase at a rapid rate, some demographics of renters can still buy into the dream of home ownership. For example, people who own their homes can help their millennial and Gen Z children afford a down payment. \u201cWith housing prices up, Mom and Dad are sitting on $500,000 of home equity, so they can give you a gift that lets you get into home ownership,\u201d Schuetz said.<\/p>\n\n\n\n
These groups are the manifestation of America\u2019s long-term vision for wealth building. When the US created the Federal Housing Administration in the 1930s to help Americans secure home loans, the hope was to increase home ownership and build generational wealth. And it worked; home ownership rates increased from about 50% to nearly 70% today.<\/p>\n\n\n\n
But those efforts to help people buy homes excluded non-white Americans, who were denied loans and locked out from desirable neighborhoods. This was particularly devastating to Black Americans, and by 1960, the ramifications were clear: just 38% of Black households owned their home compared with 65% of white households.<\/p>\n\n\n\n
Today, that home ownership gap is even wider \u2013 and the gap is expected to widen even more by 2040, according to a 2021 Urban Institute analysis.<\/p>\n\n\n\n
For renters, increasing housing prices means the promised land of home ownership is further away \u2013 and for households that don\u2019t have family wealth to help with a down payment, that gap may never be bridged.<\/p>\n\n\n\n
During the pandemic, the federal government passed several unprecedented measures to help renters, including $46bn for rental assistance, an eviction moratorium, and an expanded child tax credit that kept 3.7 million children out of poverty. These efforts kept millions of Americans housed, as they weathered the pandemic.<\/p>\n\n\n\n
But those safety net programs have all been rolled back, and there\u2019s little political appetite to reinstate them.<\/p>\n\n\n\n
\u201cThere were lots of efforts to stem the bleeding,\u201d Airgood-Obrycki said. \u201cNow it\u2019s gone \u2013 but everyone\u2019s still bleeding.\u201d<\/p>\n\n\n\n