I suppose this goes without saying, but the highest US mortgage rates in a year are murder for aspiring first-time homebuyers. Especially those for whom the math already didn’t work which, let’s face it, is most of them.
The MBA’s weekly update showed the average 30-year fixed rose to 6.81% over the last week, while the association’s index of purchase activity fell to the lowest since the onset of the war in Iran.
Although a sturdy labor market and robust wage growth — particularly for so-called “job changers” — helps, it’s no panacea. Yes, annual pay increases are easily outstripping home price growth, but no, that’s not going to fix the country’s housing affordability problem (and “problem” is a polite euphemism) anytime soon.
Consider the figure below, which uses Redfin’s fantastic data sets to show the evolution of the affordability math for the “typical” family hoping to buy the median-priced home in June. Affordability’s based on the widely-used 30% rule — i.e., if you’d have to spend more than 30% of your monthly income on a given house, that’s a house you probably can’t afford.
See the problem? As a share of the median income, the annual pay needed to afford the typically-priced American home in June of 2012 was 75%. So, the typical family could afford the typical home — and then some. Beginning in 2022, that was no longer the case.
In January of 2022 — i.e., just before the Fed started raising rates, further squeezing buyers already grappling with a staggering increase in home prices the Fed ironically helped stoke — more than half of all US home listings were affordable for the typical American family. Today, that share’s just 34% and that’s after rising 8ppt from the record low in 2023.
“The earnings needed to buy a house have stabilized after several years of deterioration, but that doesn’t mean homes are affordable to the average American,” Redfin Senior Economist Yingqi Xu said, in an August 5 update.
“While a common rule of thumb in housing is that you should spend no more than 30% of your income on your monthly housing payment, that isn’t realistic for everyone,” Dana Anderson, Redfin’s long-time data analyst, wrote, in the same piece.
As a reminder regular readers don’t need, the 30% threshold isn’t just some useful rule of thumb for mortgage loan officers. It’s an actual marker for predicting the onset of a homelessness spiral when it’s breached in a given region’s rental market.
As the figure above reminds you, once the share of income spent on rent reaches 32% in a given community, local politicians can expect a rapid increase in homelessness rates.
If you look around the US, there are a lot of locales where renters are compelled to spend more than 30% of their income just to keep a leased roof over their heads. As Anderson went on to write Wednesday, the same’s true of the housing market. “In the more expensive parts of the country, middle-income families would have a hard time spending just 30% of their earnings on housing,” she said.
Get your trapper hats and baking pans. We can all start a band.
There is no plan, and no urgency on anything like inflation, rates, or housing (or healthcare for that matter). There is only grift, and one manufactured crisis after another. Hardened ball rooms, legal slush funds, mail-in ballots, and reflecting pool liners are our top priorities now. Nothing that actually improves anyone’s lives. Imagine if we had managed to avoid our current ME entanglement, and piled all of that money into some sort of reduced interest loan program for first-time buyers. It could have made a dent, and it might have improved our outlook as well. (Not to mention the war’s direct impact on interest rates.) Housing is too big a part of our economy to be left on auto-pilot and continually ignored.
Nice graphic, Papa was a rollin stone…
“Papa wasn’t too much on thinking …. Spent most of his time chasing women and drinkin.”
From memory. Back in my college days, I proudly applied that lyric to myself.
We have no policy. We have no technocrats.
Only grift.
I hang my hat in Tennessee, and all my exes live in Texas…
The Fed’s chart on housing inventory is as expected. Good news? Inventory is increasing, but is the inventory reflective of what is ‘needed’. I know, far be it for me to determine what is ‘needed’ for any home buyer but historical data that I could find shows that housing (single unit family homes) are far larger than what they were in the 70’s (1600ft^2) and likely even larger than what they were in the 50’s (I’d guess 1100ft^2).
The issue is you can’t shrink the average size of the house in inventory, you can only reduce the price or not sell it.
A house can either be built affordable (government can help here with zoning laws encouraging more multi-unit housing, and maybe something that could encourage smaller single unit homes) or sold for an affordable price (at the home builders/holders loss). Higher interest rates will, and may have already started, to reduce home prices. Unfortunately, it’s going to painful for some entities but someone’s gotta pop that balloon.
Offer government incentives and/or tax breaks to communities and builders that build smaller homes with a negotiated price ceiling. If you you enable first time buyers to obtain affordable homes, prices will come down on all the over-priced McMansions nation-wide, and this frozen market can finally start to move again.
Part of the issue is the simple math of building bigger. Builders long ago figured this out, and their operations management software points them in the same direction.
Consider a simple 1 story house on a 900ft^2 slab. Small. Affordable. Now make it two stories. You double the size of the walls, but the slab and roof stay the same size. Now scale up the foortprint. Double the width and length. You quadruple the square footage. You also quadruple the size of the slab (but not the cost. You need 4x as much cement, but the crew size stays the same, and it doesn’t take all that much longer to pour). You quadruple (or more) the size of the roof. But the walls you only double (the area has quadrupled, but the perimeter has only doubled). Thus the highest cost/ft^2 house, keeping all else equal, is the smallest house. Given limited labor resources, the efficient path for builders is to go big, sandwich them painfully close on small lots, and sell to the upper middle-class and above.
Very true. That’s why I think some sort of government incentive or tax break would be necessary to get it done. Otherwise, we will just get more of the same.
Housing in a lot of places for well worn homes can still approach 2 commas, never mind $400 and change (the coasts, and a lot of places in between). So the choice for too many is a shoe box apartment and spending whatever excess on experiences (even if that is heirloom tomatoes, truffle oil and avacados). Or having a monster mortgage payment to contend with. That being a long time – I think it will be a long time before the Hamsters rebel.
Humble apologies – meant to say – that being said – I think it will be a long time before the hamsters rebel. Need to proofread more.
There is no revolution for the US … hamsters are too busy grinding out on their wheels to muster the energy or attention for anything remotely resembling revolt. To recall, and expound upon, the mindset of financial stress from the latest monthly – hand-to-mouth living leaves little room for considering the unfairness of it all, outside of your immediate situation. So, politics? Pfft. Rule of Law? What law? Equality? You’re kidding, right? Anyone that has the literal luxury of considering those things, and how they impact their day-to-day, also has way too much to lose to actually, meaningfully revolt. Revolution in the US has been relegated to theater … like most other things.
The National Association of Realtors runs neck and neck with the Chamber of Commerce as the largest spending lobby group – self explanatory.
It used to be said that the basis for success in the US economy was the automobile. Ever since the Japanese revolution in the auto business came along in the late 80s and 90s, and the age of the 1000 sq ft basic house disappeared, real estate has ruled the roost and will continue to do so. Watch TV and you will rarely see an ad with a 1500 sq’ house in it. Everyone wants to live large and if they have a decent car they can’t afford the house that goes with it. The trouble is our bosses (business and government) mostly haven’t ever had to live real life and be able to pay for it. Trump has never paid for groceries, had a student loan (or based on what he knows even been a student), made a rent check, or even had an actual job. Life in America is split between poor and LaLa Land. 20-25% of our kids go to bed without a full meal that day. In Independence, MO, home of President Truman, 80-85% of families quality for food aid from the government.