Astronomical mortgage rates across the Wasatch Front and the US (plus ever-rising home prices) have made it more difficult than ever to buy into a home, especially for first-time buyers. The typical buyer needs to earn 15% more than they did a year ago– despite wages only being up 5%. Utah is no different. For example, in Salt Lake City the average income needed to comfortably afford a home is 13% higher than 2022. That’s because, on top of increased mortgage rates, the average cost of a home is now over a half-million dollars.
The current housing landscape presents a formidable challenge, primarily attributed to the confluence of soaring mortgage rates and escalating home prices. As of August, the average rate for a 30-year fixed mortgage reached an imposing 7.07%. However, subsequent weeks witnessed an even steeper ascent, culminating in a crest of 7.57% during the week ending October 12—a zenith not scaled in over two decades. This surge in mortgage rates has undeniably subdued demand, yet the persistent scarcity of housing inventory exerts upward pressure on home prices. In August, the median price of a U.S. home stood at approximately $420,000, reflecting a year-over-year surge of 3% and hovering merely $12,000 below the record pinnacle attained in mid-2022.
The Affordability Death Spiral
Evidencing the gravity of the situation, the monthly mortgage payment for the typical U.S. homebuyer has surged to an all-time high of $2,866. This marks a substantial 20% increase from the prior year when payments had already escalated significantly since the outset of the pandemic, characterized by historically low mortgage rates and pre-soaring home prices. To provide perspective, in August 2020, a prospective homebuyer would have faced a monthly payment of $1,581, predicated on the average mortgage rate of 2.94% during that month, and a median home price of $329,000. At that juncture, an individual would have needed an annual income of $75,000 to attain the typical home.
The prevailing economic landscape underscores a substantial incongruity. The typical American household’s income falls short by approximately $40,000 compared to the requisite earnings for acquiring a median-priced home. In the most recently available data from 2022, the median household income registered at roughly $75,000. While hourly wages have witnessed some increments in 2023, they have failed to keep pace with the burgeoning income requisite for homeownership. Notably, the average U.S. hourly wage has experienced an approximate 5% rise over the past year.
Chen Zhao, the Research Lead at Redfin Economics, elucidates the current scenario: “In an ideal scenario for homebuyers, surging mortgage rates would trigger a decline in demand and home prices, offsetting the burden of high interest payments. However, the reality diverges from this ideal: Although new property listings are showing a slight uptick, housing inventory remains close to record lows as homeowners cling to their existing low mortgage rates. Consequently, this sustains the upward trajectory of home prices. Therefore, prospective buyers, especially first-time purchasers, who are committed to entering the housing market should contemplate unconventional approaches. This may entail considering condominiums or townhouses, which tend to be more budget-friendly than single-family homes. Additionally, they might explore relocations to regions with greater affordability or more economical suburbs.”
It is imperative to discern that while affordability concerns loom large, certain segments of buyers remain relatively unaffected. All-cash buyers and those progressing from their initial home purchase belong to these more favorable categories. The substantial income escalation required to secure a home purchase disproportionately burdens first-time buyers. Individuals with the capacity to purchase homes outright are insulated from the vicissitudes of high mortgage rates and typically possess incomes surpassing the prerequisites for homeownership. Nevertheless, a caveat to this concession is those who entered the housing market at the pinnacle of the pandemic-induced boom, securing ultra-low mortgage rates and now face the necessity of selling their homes. In such instances, they are not only relinquishing advantageous mortgage rates but may also be confronted with losses on their properties.
Assessing the metropolitan landscape, a uniform trend emerges—homeownership is becoming more unattainable across major metros. The income requisite to afford a home has escalated in every major metropolitan area, encompassing regions where home prices have witnessed declines over the past year. Among these metros, Miami and Newark, NJ bear the brunt of this escalation, mandating homebuyers to earn 33% more compared to the previous year to afford a typical home. In Miami, prospective buyers must command an annual income of $143,000 to accommodate the area’s monthly mortgage payment of $3,580, whereas Newark necessitates an income of approximately $160,000 to meet the $3,989 monthly payment.
Six Figure Incomes Now Par for the Course
This nationwide trend is underscored by the fact that buyers in half of the 100 analyzed metros must command a six-figure income to qualify for homeownership, necessitating earnings of at least $100,000. Across the entirety of the United States, a minimum annual income of $50,000 is indispensable to embark on the journey of homeownership.
In the most exorbitantly priced markets, such as San Francisco and San Jose, CA, aspirant buyers must command incomes in excess of $400,000 to navigate the financial prerequisites for a median-priced home. This represents a nearly 25% year-over-year escalation. Following closely, the next five metros within the list are all located in California: Anaheim ($300,000), Oakland ($250,000), San Diego ($241,000), Los Angeles ($237,000), and Oxnard ($233,000).
The repercussions of rising mortgage rates are not confined to homebuyers alone, as they extend their reach to home builders. Preliminary data suggests that housing starts experienced a substantial 11.3% drop in August compared to July. This decline is evident across various categories, including multifamily units like apartments and condos, which witnessed a particularly steep plunge, alongside single-family home starts, which registered a 4.3% reduction.
Builders commenced work on new single-family homes at a pace of 941,000 annually in August, signifying a 16% decrease from the average construction rate observed from mid-2020 to mid-2022. This decline aligns with insights gleaned from a survey conducted by the National Association of Home Builders, indicating a pronounced dip in builders’ confidence.
Ultimately, the prevailing impasse revolves around two indomitable forces: the millennial generation, in the throes of their prime years for child-rearing and in quest of suitable housing, and the Federal Reserve, resolute in its endeavor to combat inflation by wielding its primary weapon—interest rates.
This standoff has precipitated a dire housing affordability crisis. Builders find themselves at a crossroads, wrestling with the quandary of whether to construct homes that may necessitate financial assistance for prospective buyers, especially in light of mortgage rates exceeding 7%, or to withhold construction efforts, thereby exacerbating the prevailing long-term housing supply conundrum.
Recent data confirms this predicament, with housing starts in August exhibiting an 11.3% decline from the previous month. While this drop was predominantly driven by the decreased construction of multifamily units such as apartments and condos, single-family home starts also recorded a notable 4.3% decrease.
To encapsulate the gravity of the situation, millions of millennials entering their prime child-rearing years are on the hunt for suitable housing, while the Federal Reserve’s unwavering resolve to combat inflation via interest rate adjustments introduces further complexities into the equation.
The outcome of this impasse presents a dire housing affordability crisis. Builders are caught between the pressing need to construct homes that may require financial assistance for potential buyers, particularly given the prevailing 7%+ mortgage rates, and the prospect of exacerbating long-term housing supply issues if they opt for restraint.
This narrative is underscored by the data, with housing starts in August plummeting by 11.3% compared to July. Although this decline was predominantly driven by reduced multifamily unit construction, including apartments and condos, single-family home starts also saw a significant contraction of 4.3%.
Homebuilders Caught in the Crossfire
The concurrent erosion of builder confidence further underscores the complex dynamics at play in the housing market.
In the words of Robert Dietz, Chief Economist at the National Association of Home Builders (NAHB): “High mortgage rates are evidently exerting a negative impact on builder confidence and consumer demand, as an increasing number of potential buyers are opting to postpone their home purchases until long-term rates experience a decline.”
The current situation can be summarized as follows: The upsurge in mortgage rates that commenced in early 2022 momentarily alleviated the pressure on home prices. However, this relief was short-lived. In June, the S&P/Case-Shiller national home price index exhibited a temporary decline in home prices, subsequently rebounding to reach its previous all-time high from a year earlier, with a negligible 0.02% deviation if one wishes to delve into the minutiae.
This scenario reflects a demand influenced by geographic factors, juxtaposed with a limited supply.
An additional facet to consider is the pivotal role played by demographics. The peak year for births in the expansive millennial generation, often referred to as the “ultra-large millennial generation,” occurred in 1989. As this cohort approaches the age of 34, it aligns with a life stage characterized by marriage and child-rearing, which in turn, engenders a heightened demand for larger living spaces.
In quantifiable terms, these factors collectively contribute to an overarching affordability crisis. To illustrate, envision a house that was priced at $500,000 just two years ago, with a family securing a mortgage for 80% of the purchase amount. At that juncture, the prevailing national average for a 30-year fixed mortgage rate stood at 2.86%, resulting in a monthly payment of $1,656.
A 13.5% increase in home prices since then, as per the national average according to the Case-Shiller index, would elevate the price of that residence to $568,000. Consequently, a surge in interest rates to 7.18% last week would result in a monthly payment of $3,077 for the same property.
In summary, the current state of the housing market underscores the pitfalls of heavy reliance on interest rate policy as a guiding force for the economy.
The ultimate solution lies in bolstering the housing supply, although it remains elusive as long as homebuilders remain cautious due to concerns about rates and affordability.
How Millennial Buyers are Paying Up
An astounding 38% of recent homebuyers below the age of 30 relied on either cash gifts from family members or inheritances to facilitate their down payments. This revelation stems from a survey commissioned by Redfin, conducted among recent movers in the spring of 2023. The escalating costs associated with first-time homeownership have made it increasingly inaccessible to young individuals lacking familial financial support. Consequently, a significant portion of young homeowners can be characterized as “nepo-homebuyers,” signifying their reliance on family funds for home purchases. This trend contributes to the perpetuation of wealth disparities across generations and imposes limitations on the economic prospects of young individuals and their families.
Assistance from Family for Young Homebuyers
It is not uncommon for young individuals to receive assistance from their families when endeavoring to purchase a home. Statistics indicate that senior Americans aged 65 and older are approximately twice as likely to be homeowners compared to younger Americans under the age of 35. In many cases, young individuals who do manage to own homes have received financial support from their families. According to a Redfin survey that inquired about the financial sources for down payments among recent homebuyers, 509 respondents under the age of 30 revealed that 23% utilized cash gifts from family members, while 21% relied on inheritance funds for their down payments.
This phenomenon of family assistance is not unique and can be observed across various demographics of young homebuyers. The affordability of starter homes has been progressively diminishing over the years, with the income required to purchase such homes steadily rising, having surged by 13% in the past year alone. Consequently, many young individuals find themselves turning to familial support as they strive to take their initial steps on the housing ladder.
For those young homebuyers lacking family financial support, achieving intergenerational wealth presents a formidable challenge. In the United States, specific neighborhoods are identified as high-opportunity areas, offering children from low-income families enhanced prospects of achieving higher incomes in adulthood. Harvard economist Raj Chetty has identified these locales as high-opportunity neighborhoods. However, an analysis conducted by Redfin reveals that these high-opportunity neighborhoods have gradually become less affordable for the families who stand to benefit the most from raising their children in such areas. The availability of affordable homes for sale in high-opportunity neighborhoods declined from 37% in 2013 to a mere 13% in 2022.