Can the Average American Afford a Home Anymore?
Recently, one of my Millennial children tried to buy a home in the Layton, Utah, area. He repeatedly bid against people offering more than $20k above the asking price. Realizing he had to have even more cash upfront, he managed to come up with an extra $15k to add to his bids, but it still wasn’t enough. He simply didn’t have the extra stores of cash to outbid those who did. After months of being outbid, he decided to wait and see if the housing market cools off a bit. So he stayed in the rental he’s in now, with his roommate (how many Millennials can afford a place by themselves these days?), paying $1,800 a month in rent for a home that would cost him about $1,500 a month to buy.
I can’t help but wonder if any of my children will ever be able to afford a single-family home on their own, without roommates sharing the burden. The American dream of homeownership has changed significantly in the last year, and for many people, it’s not for the better. I can’t help but wonder how Americans will fare as they settle into exorbitant mortgages that swallow up significant chunks of their income!
Homeownership in the United States
In the last ten years, existing single-family homes for sale have declined more than 30%. The decline in home supply and myriad other factors has caused the price of homes to explode. The median home price has gone from $172,935.67 ($198,617.62 adjusted for inflation) in December 2011 to $372,400 in April 2021.
With the largest increase in home prices in the history of the United States and the significant decline in available single-family homes, the future of homeownership for many Millennials and Generation Zs is murky.
The average homeownership rate (the proportion of homes owned by their occupants) in the United States had grown since 1890, when it was 47.8%, to 69.2% in April 2004. By April 2021, the rate fell to 64.6%. Due to covid-19 and the subsequent rise in building supply costs and drop in inventory, the effects on homeownership are yet to be seen. With mortgages surpassing the tolerance of many American households’ income (more to come on that), it seems as if a slowdown in homeownership and an increase in foreclosures is inevitable. As high net worth individuals and institutional investors continue to snatch up homes and further reduce the housing supply, they drive the prices even higher. Is there any hope for the rising generations?
How Much is Too Much?
Speculation about what to do about the fading dream of homeownership for many Americans has yet to bring up any realistic solutions. As the median price of homes increases, it’s natural to wonder how much an American household can really afford for a mortgage! Are we beyond the point of no return for many Americans and the rising generation, or is there still hope?
How Much of a Household’s Income Can Be Considered a Realistic Amount to Put Towards a Monthly Mortgage?
It depends. It depends on who you ask, and it depends on a family’s tolerance for debt.
Suggestions on mortgage payment tolerance levels from financial advisors generally range from 25% of your gross monthly income to 28% (the Monthly Income Rule). The Annual Salary Rule suggests that the ideal mortgage should be three times your annual salary (or less). Ask a bank or loan officer, though, and their suggestions are higher, ranging from 28% to 35%. But the range goes even higher! The Consumer Financial Protection Bureau (CFPB) reports that households can rise to 45% on their debt-to-income ratio. If a consumer has no other debt, the CFPB states that it’s acceptable to loan a qualified buyer that amount for a home!
Imagine paying 45% of your gross income to housing costs. Maybe you already do! For too many people, that’s far too much to put towards the roof over their heads.
How Many Americans Will Be Able to Make Their Mortgage Payments in the Coming Years?
Studies show that consumers with a debt-to-income ratio higher than 43% have a higher likelihood of struggling to make their mortgage payments than consumers with lower debt-to-income ratios. Historically, consumers who stay below a 28% debt-to-income ratio have fewer issues paying their mortgages over time than consumers with higher debt-to-income ratios.
Median Housing Prices vs Median Household Income
Let’s take a look at how this all plays out for the current state of mortgage costs and the median American household income.
Median House Price and Median Income
The median price of a home in the United States in April 2021 was $372,400. A borrower with a 30-year fixed-rate mortgage with a 10% down payment and a 3.132% APR will pay about $2,093 a month for a mortgage payment. If we apply the 28% rule to the median income of American households – $79,900 – the monthly payment would be $1,864 per month (or lower!). That’s $229 above the 28% comfort level.
According to the U.S. Bureau of Labor Statistics, housing costs ranged from 27.5% to 36.8%, with an average of 32.9% of household spending going towards housing costs. In the United States, the median average monthly mortgage payment is 31.4% of the median household income. That’s higher than the 28% comfort level that many experts suggest. It’s also higher than the historical data shows, as mentioned earlier, as a cut-off line for those who are more likely to make their mortgage payments over time.
It’s Not Set in Stone
Of course, many factors can cause vast variations in the monthly payments (a higher or lower down payment, higher or lower interest rates, etc.), and keep in mind; these are the median numbers. That means that a lot of houses cost less, and a lot of houses cost more, much more. Not to mention, many people earn significantly less, and many people make considerably more than the median American household income.
If we stick to the recommended percentages, median housing costs in the U.S. fit into median household income as far as mortgage payments as a percentage of monthly household earnings. These numbers are acceptable for those who make the median amount or higher but don’t sound great for those who don’t.
With the FHFA mortgage moratorium still in effect until June 30, it’s impossible to get an accurate picture of what the foreclosure rate will do. The deadline gives borrowers time to apply for forbearance. Their forbearance can last up to 360 days, extending the time that many foreclosures will not be allowed.
Struggling to Make Payments
Are a lot of Americans behind on their mortgages? In February 2021, over 10 million homeowners were behind on mortgage payments. When the mortgage moratorium expires over the next year and borrowers are required to start paying their mortgage payments, along with making up their missed payments, the foreclosure amount will likely rise. Appraisers would be wise to be prepared for an increase in foreclosure appraisals as borrowers discover the extra burden of catching up is frankly too much!
Predicting the Future
Let’s face it, predicting the future in real estate is a fluid process at best. Last year was a surprise to many, and 2021 continues to smash ahead, pumping rates to impossible heights and gobbling up home supply in record time. Many factors continue to drive the price of houses up, with little apparent relief in the near future. Will 2022 be the year of the foreclosure, or will the economy balance out and borrowers rebound enough to keep their homes? We have to hope for the best!