Home ownership is a pillar of American culture. It represents independence, status, and upward mobility. One could even say it’s one of the first steps in achieving the coveted “American dream.” Frighteningly, that is just what it has become for many Americans: a dream.
Home ownership across America is becoming exclusively reserved for the wealthiest and most affluent demographics. The recent inflationary surge in pricing of everyday goods and the rise in mortgage interest rates has discouraged many middle-class families from entering the heated housing market.
On the other side of the coin, builders are taking notice of the slowing demand and proceeding cautiously with new starts. Data shows new home starts have been declining month to month for most of this year. Supply chain issues and economic uncertainty are also factors weighing on builders across the country. With demand slowing and supply of new housing trickling to record lows, there seems to be little to no relief on the horizon for home affordability.
Inflation and Interest Rates
In the first half of 2022, inflation and rising mortgage interest rates have been the at the forefront of all news headlines. According to the U.S. Bureau of Labor Statistics, the consumer price index has risen 9.1% in the last year for all goods and services. With items like gas, groceries, and utility bills stretching a median income family’s budget tight, there is no room for them to consider saving money to purchase a home. People are dipping into savings to afford everyday expenditures at this point.
Appreciating home values have outpaced wage increases to the point where a majority of Americans spend more than 30% of their income on rent or mortgage payments—flying in the face of a rule established in 1981 that’s says, “a family is ‘cost-burdened’ if they spend more than 30% of their wages on housing.” When you couple this with mortgage interest rates creeping up into the 6% range, it is hard to see how anyone is expected to achieve the American dream via home ownership.
Inventory Shortage
Part of the housing price increase can be attributed to a lack of housing supply. After the Great Recession, we failed to build enough housing and that is finally catching up to us. In 2022, new housing starts are falling each month because hesitant builders are stretched thin by supply chain issues and are nervous about a decrease in demand due to climbing interest rates.
Without enough inventory on the market, home values have risen in almost every metropolitan market as buyers compete with one another for the few homes that are available. Additionally, after the pandemic sent many employees to work from home, a number of affluent workers with healthy incomes found themselves in a permanent work-from-home situation that allowed them to leave the city and relocate to the suburbs. Evading the high prices in the cities and reducing potential exposure to any viruses while being able to work from home seems like a win-win. It wasn’t for the median income family that was barely holding on to afford living in that very same suburban community. Now they’ve been priced out by rising rents and housing prices the wealthy folks from the cities are willing to pay.
For now, there is certainly a grim outlook for the housing market. Families will be faced with tough decisions for the remainder of this year as they wait to see what happens with interest rates. There is no quick fix for a volatile market like this.
Increasing our housing supply by supporting our builders across the country is imperative. If we approach this the same way we did after the 2008 financial crisis, we will only compound the housing price increase issue. Shifting policy to make federal grants more available to builders and focusing on supply chain shortcomings would be a push in the right direction.
For many Americans, the hopes of one day buying a home seem to be getting increasingly unattainable. For too long we have allowed home prices to soar without increasing our supply. Inflation and interest rates will eventually take a turn in a more favorable direction, opening the possibility for median income families to begin saving money again. In the meantime, we must focus on supporting our builders in America to make sure we can continue to increase our housing supply. Clearing up supply chain issues and supporting builders at a federal level is of high priority if we would like to see the next generation be able to afford the American dream.
Taylor Miller is a project specialist and marketing coordinator for Owner Builder Advisors, where he helps developers and owners navigate the construction process. He has been actively involved in the construction and inspection industries since 2016.
Miller also manages marketing campaigns, social media, and document generation/compilation for both formal and informal application processes.
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