Why Can't Anyone Afford A House?

Another Summer has given way to the crisp winds of Autumn. As the cooler temperatures and falling leaves begin to turn ones mind toward the importance of having a warm place to stay in the upcoming months, it would be prudent to look at how housing affordability has become a true concern for most people in the United States. In a very informative, yet eye-opening article, EconoFact discusses how the vast majority of household are spending well over 30% of the their income on housing. This figure includes both homeowners and renters.

The recently decline in housing unaffordability is concerning for a number of reasons. One of the primary concerns around this current economic trend is the financial stress that higher housing costs place on households. Considering further the inflationary pressures of the past five years and it appears that most American households may be squeezed into an impossible position.

Origins of the 30% Figure

The conventional wisdom that a household should spend no more than 30% of their income on housing is frequently quoted in real estate. The origins of this adage actually have their roots in the Brooks Amendment of the 1968 Fair Housing Act. This amendment to one of the most influential housing laws of the 20th century ensured that rents in public housing developments were capped at 25%. Adjusting for cost of living changes, the 25% figure was ultimately raised to 30% in 1981. The 30% figure moved from the world of public housing rents to housing in general by the underwring practices of Freddie Mac and Fannie Mae, who adopted 30% as part of their underwriting guidelines. Presently, Fannie Mae uses 36% as its Debt-to-Income ratio underwriting guideline before imposing additional requirements on the borrower. Notably, the acceptable percentage of income spent on housing has consistently risen over the past few years and despite the fact that wages are rising faster than inflation, this rising percentage is concerning.

The National Association of Realtors's quarterly Housing Affordability Index, a metric that demonstrates the average housing burden on households, has trended downward in last few quarters. The bottom line is that housing is becoming more expensive, even as inflation is subsiding, and other prices are dropping. There are several factors that have contributed to the trend of declining housing affordability, including a shrinking housing supply, previously high mortgage rates, and corporate investments in single family homes. This shift in home purchasing, whatever its origins may be, changes the dynamic of the household in the United States.

A New Role For Housing?

In the past, purchasing a house served multiple purposes for a family or household. It was a source of generational wealth. As housing equity accrued, homeowners were able to use the equity to access greater financial goals. It was a source of stability. Homeowners became invested in their neighborhoods and not only consumed locally, but also invested in local businesses. This stability and pride of ownership ensured for a stable local tax base for communities that was reliable and predictable, as the cycle continued with each continuing generation.

Although major disruptions to this traditional model started decades ago, moving away from housing as the largest source of household wealth and the basis of community stability has serious consequences. The American economy, education system and many its cultural systems are still largely dependent on the traditional model of community investment. Although many major cities have established thriving communities in which the majority of the residents in the area are renters, these communities are sustained by higher population densities and other idiosyncrasies that are unique to urban areas. The United States is by no means a post-homeownership economy and housing unaffordability presents very real economic questions and issues.

Whether the current decline in housing affordability is a momentary movement in the market or a signal of a changing economic reality is something that will only become evident with the passing of time. Housing is an essential human need and its status will always be newsworthy. How households will ultimately adjust to housing prices, however, is less clear.