Most markets around the country are seeing outrageous and unrealistic housing prices. According to a Bankrate report, the average home price has increased by about 30% in the last decade as the money people make has only seen a gain of around 11%. The American dream of buying a home is becoming out of reach for a growing number of middle-income families in the country and it is leaving many people on a fixed income in a serious financial situation that has the potential to leave them homeless.
Although the news of rising wages and an abundance of available open job positions appear promising on the surface, it really is not when you factor in the rising cost of housing that is outpacing the increase in what people are earning at their place of employment. The cost of this doesn’t even factor in the price of healthcare and education which are also outpacing the earnings of most people. Add the recent rate of inflation that hasn’t been seen for decades and this is leaving an increasing number of people with a challenging time affording a place to live. Furthermore, it is leaving any possible homeownership out of reach.
If home prices do not come down, employers do not start to pay even more, and additional living costs do not slow down, there will be some very big problems in the future. This will be particularly the case for middle America.
How much are home prices rising?
Taking inflation into consideration, the price of a home has gone up 118% since 1965. This is all while incomes have seen an increase of just 15% during the same time. The median home price estimated in March was at around $361,000. U.S. prices for houses are expected to continue to grow at a rapid rate this year even with the Federal Reserve expecting to raise interest rates, according to a Reuters poll of analysts that are forecasting a market for sellers for at least another two years.
Rapid rising home values can differentiate depending on the area of the country a person lives. For example, Zillow estimates Tampa, Florida will be one of the hottest housing markets in 2022 with expected home value growth of around 24% while the national average is forecast for 14.3%. The current record inflation rate of about 8% does not even come close to how fast home prices are presently rising. The rapid cost of a college education that historically doubles about every nine years at twice the rate of inflation is also not even close to how quick the price of buying a home is becoming.
It’s not just the price of buying a home that is rising rapidly but also the cost to rent.
Not only is buying a home becoming out of reach for many people but the cost just to rent a place to live is also increasing at a dangerous rate in comparison to what people are earning at their place of employment. A survey by Redfin found that 50 of the largest cities had an average rental rate increase of about 3% in 2020. Last year the report showed an increase of 14%. Cities in Florida, New York, and New Jersey are seeing particularly high increases in rent while Austin, Texas had the biggest one-year gain in rent price increases at 40%.
The national average rent price for a place to live right now is $1,877 with areas in Florida reaching an average monthly price of $2,076. Cities such as New York and San Francisco, should not come as a surprise with average rent prices exceedingly over $3000 per month.
Why are home prices and the cost to rent going up so fast?
Although Washington politicians would like to place blame for the high cost of housing on the opposing political party, the truth is it isn’t just one component that has created the problem. The real responsibility can be attributed to several factors.
Supply and demand play a role in high housing costs.
Just like increasing prices with many things, both the supply and demand are almost always a factor. For people that live in popular areas that have favorable job prospects and low tax rates, it should not come as a shock that housing is in demand and there is a shortage. People regularly look to live in places where they can succeed financially.
A good example of an in-demand housing market right now is the state in which I reside, which is Florida. The rent and home prices are increasing rapidly as people are fleeing northern and western states in favor of lower taxes. Because homes and rent in cities, such as New York and Chicago are high in comparison to Florida, the people from these areas moving here can afford housing. The result is an influx of people to the state that can both afford to buy a home and even often they are willing to pay a premium. Both the supply and demand are driving prices up.
If someone in California for example can sell their home for 800K and move into a comparable home in Florida for 400k, they are happy to do so and even frequently willing to pay a premium.
Regulations and building costs play a role in high prices for housing.
Because inflation is currently hitting a 40-year high, the costs for materials and labor are high. This results in builders being required to raise their rents and sale prices to offset the increasing expenses to both build and maintain properties. The obstacles they are being required to overcome financially while remaining profitable are being passed to home buyers and renters.
The high prices for building supplies and finding employees for construction projects is not the only challenge to keeping housing prices reasonable. As more regulations are also continually implemented for builders and contractors at higher prices, this also discourages a growing number of them from wanting to develop more housing. The result of this comes back to supply and demand. For many areas of the country that are seeing a surge in population, housing is just not being built fast enough to meet demand. Moreover, the current inventory of homes is not adequate for the number of people looking to buy one.
Price gouging does exist.
Even though there are plenty of reasons currently for the high price of housing, it is impossible to not recognize that some landlords and home builders are price gouging. These people will charge the amount of money the market is willing to pay regardless of the money people might truly be able to afford.
Rent control could potentially help with surging costs in areas of the country. However, rent control regulations are currently only in five states in the U.S. and the District of Columbia. This leaves most of America with no way to prevent some builders and landlords from taking advantage of people looking for a place to live.
Why is the high cost of housing a big issue?
The principal problem with the trend of rapidly increasing home purchase and rent prices are the consequence it is having on middle-class Americans. The American dream of homeownership is disappearing for more people in the country each year. This is not only an issue of fulfilling the goal of owning a home for many people but it also will have a long-term financial impact.
Homeownership is becoming out of reach for the middle class.
Homeownership has continually been included in the supposed American dream for some time now. The problem with excessive home pricing is it limits who can afford to purchase a home. Higher costs for things, such as medical care and education, have already started to phase out many people from an eventual home purchase or at the very least delays it.
Because more young adults are carrying higher amounts of student loan debt and medical insurance is covering less with increasingly higher deductibles, homeownership has already been on the decline for many middle-income families.
Most experts would agree that a person should not spend more than 30% of their income on housing. With the median income level in America estimated at around $60,000 per year before tax, this is $18,000. Divide this by 12 months and most people should not be spending more than $1500 a month on rent or a home mortgage. The problem with this figure is the national average rent I previously mentioned at $1,877 per month.
The principal problem with high rent prices is how it relates to homeownership. With monthly rent already costing more than most people should be spending, saving for a down payment to purchase a home becomes much more difficult.
Homelessness should be a concern with the high prices of housing.
Another concern with excessive housing prices should be homelessness. If the cost to buy or rent a place to live outpaces the money most people earn, this creates a difficulty for people to find a place to live. The relationship with major living costs rising rapidly makes it even more challenging for people to afford housing. The high costs for education and medical care in combination with paying for housing make making ends meet even more demanding. Working people can try to keep up with the rising prices but those on fixed incomes will have an even harder time. The result will be outpricing people from having the ability to afford a place to live.
Outpricing people for affordable housing is already common in states such as California and New York. Not all homeless people are drug addicts or mentally ill. There are people that simply cannot find adequate employment to cover the expenses for housing. A simple fix would be to just move to a less expensive area of the country. Yet, some people do not even have the financial stability to successfully relocate to a less expensive area.
The high cost of housing will widen the gap between monetary classes even further.
Homeownership has always had a strong correlation to financial security and wealth. With more of middle America not being able to afford to purchase a home at some point, this will extend the gap between rich, poor, and middle-income families. The income gap, in general, has already begun to widen between classes. However, limiting the ability for homeownership will only accelerate the issue.
Because high home purchase and rent prices exist, middle-income families with no generational wealth will have a hard time putting the money down to buy a home. Families that can pass home equity to future generations for new homes and high down payments will be the only people that are able to buy their own house. This will basically keep more of middle America from being able to acquire a home of their own.
Middle-class America is already stretched thin financially from years of rising education and healthcare costs. Surging home and rent prices combined with the record-high inflation the country is experiencing will divide the country even further than it already is on both a monetary and political basis.
The question most of middle America should be asking is will home prices and the cost of rent level out in comparison to the income most people are able to earn? Housing and rent costs are just part of the problem. Yes, these costs are rising at a rapid rate. However, a big problem is the wages most people earn are not keeping pace with the escalating costs to live.
Home purchase prices and rent costs do need to be brought under control. But without additional changes in the corporate world and the workplace overall along with the values, much of America has learned to live with, nothing is going to change. Moreover, changes need to be made in Washington for improving middle America and not just changes for the interests of the people in the office.
Without a transformation in family values, people, and politics, there is little chance the middle class will be getting ahead and securing any financial security for the future.