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Home Ownership Increasingly Impossible for Most Americans, New Study Finds

By Thomas O'Shaughnessy | December 30, 2021

Becoming a homeowner is a cornerstone of the American Dream. Soaring housing prices, however, are making that increasingly difficult for most Americans to achieve. First-time buyers — particularly millennials — are more likely to struggle to make that dream a reality than earlier generations.

Here’s a breakdown of an October 2021 study on the housing market, what it means for prospective buyers, and steps they can take to become homeowners.

How much do homes cost?

Taking into account inflation, home prices have increased by 118% since 1965. At the same time, median household incomes have increased by just 15%. That means home prices have increased 7.6 times faster than the average income.

Since 2008 alone, home prices have increased 3.1 times faster than income.

What does it cost to afford a home?

In 2021, a U.S. household requires an average income of $144,192 to purchase a house. That doesn’t bode well statistically when the median household income is $69,178. That’s less than half of the income needed.

What is the house-price-to-income ratio?

House-price-to income is the amount of time it should take a buyer to save enough money to buy a house. Experts recommend a ratio of 2.6, which means it would take a prospective buyer 2.6 years to save enough money to purchase a house. 

The current average ratio, however, is 5.4, which is twice the recommended amount. During the pandemic, the ratio grew 14.9% between 2019 and 2021. 

Although these latest reports look bleak, there are still opportunities for younger generations to buy in more cost-friendly markets.

For example, buyers who work from home or have flexibility in their living geography could look to purchase in a metropolitan area with a house-price-to-income ratio that falls within the recommended amount. Six of the 50 biggest metropolitan areas meet that guideline: Pittsburgh (2.2); Cleveland (2.4); Oklahoma City (2.5), St. Louis (2.5); Birmingham, Ala. (2.5); and Cincinnati (2.6).

At the same time, people should exercise caution when purchasing in the metropolitan areas with the highest house-price-to-income ratios. The least affordable markets in terms of house-price-to-income ratio are, unsurprisingly, in California: Los Angeles (9.8); San Jose (9.1); San Francisco (8.3); and San Diego (7.8).

How does inflation affect mortgage rates?

Inflated home values have also affected underwater mortgages, which are home loans where the principal is greater than a home’s worth. From 2015 to 2020, the percentage of homes with underwater mortgages decreased by 54% in the most populous metropolitan areas. The average fell from 12.2% to 5.6% because the rising home prices increased homeowners' equity.

This sounds promising on the surface. But it can pose concerns for homeowners the next time there is a housing crash. This may be particularly troubling for buyers who bought their first homes during the pandemic because they have not yet had time to pay back a significant part of their principal.

First-time buyers hoping to make their dreams of homeownership a reality may need to think strategically when it comes to their mortgage. To secure pre-approval for a mortgage with a low interest rate, prospective buyers should have a good or excellent credit score as well as enough money saved up to make a significant down payment. Both can be accomplished by creating a budget with homeownership in mind. 

This inflated ratio doesn’t just mean it’s taking buyers longer to save up to buy a house. Those who can save up enough money to make an offer on a home will likely need to take out a mortgage for a hefty sum of money with high monthly payments. Those high monthly payments will leave less income for other costs of homeownership and living expenses such as food, internet, phone, and more. 

How can a partial investment property help a buyer’s bottom line?

First-time homeowners can reduce the burden of their monthly mortgage payments with some creativity. For example, they can rent out rooms to full-time tenants or as part-time vacation rentals through Airbnb income. This will allow them to pay off their principal more quickly and help them avoid falling victim to an underwater mortgage.

Becoming a part- or full-time landlord has the added benefit of laying the groundwork to become a real estate investor in the future. Real estate investments are entitled to certain tax breaks, such as write-offs and tax deferments through 1031 exchanges. Learn more about rules and regulations for 1031 exchanges in states such as New York and the best companies to use.
Although buying a home may cost more than ever in 2021, it can still provide long-term investment benefits. Understanding the market may be tricky, but you don’t have to go it alone. Consult a top-rated local real estate agent through Clever, which can give you excellent service for an affordable price.

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