The homeownership rate in the US is only 67.4%. That means one-third of Americans rent their homes or live in some alternative situation. Equity in owned homes has steadily dropped since 1945, and now averages less than half the value of the home. To add insult to injury, eleven million Americans spend half their income on rent. Those people are one paycheck from disaster, and unlikely to have any protection from life events and crises.
How did this happen? How did we lose the American Dream? Why are so many Americans paying more in rent than they would pay on a reasonable mortgage? On one hand, the housing crisis and handing out mortgages like candy certainly has something to do with it. We’re well into recovery from the housing crisis. Why hasn’t the average American family recovered?
A Focus On Class A Housing By Developers
Developers have focused on constructing Class A housing in desirable markets. There’s nothing inherently wrong with building luxury communities. Some developers focus on ensuring that firefighters, teachers, and the rest of our nation’s guardians have a place to live. Others simply focus on making as much profit as possible by building exorbitantly priced luxury housing. Communities need a range of housing, available to all. The recent boom in luxury housing has driven up the median price of housing and driven out the average people.
The average people who haven’t been driven out are now in a position where they’re severely burdened by housing costs. The cost burden on renters is only projected to rise. As a result, everyone loses. In some parts of the country, we’re returning to a world where teenagers have to get jobs because the household needs the income. This impacts their studies, of course. Worse still, it impacts their ability to get a head start on being educated for the STEM careers we most need people in.
In places like California, developers can start in the hole by fifty thousand dollars or more based on permit and environmental impact fees to build a single home. This gets passed straight to home buyers. Of course, the burden on renters is more significant. Larger multi-family projects incur larger environmental and planning fees. Those have to be accounted for, and not out of the developer’s pocket.
That’s not to say that we shouldn’t charge such fees. We do, however, need to apply reason as a society and ensure that the costs we pass on to developers aren’t so large that they make home ownership impossible. Ultimately, there is a shift towards multi-family coming in this country. Urban areas can no longer support the single-family residences of the past. Cities already under stress like San Francisco will be the first to buckle, and the loss of historic housing will be detrimental to the community. From a land-use perspective and a development cost perspective, multi-family housing is the only long-term solution that allows people the option to own their home.
Widely Varied Housing Values Impact Affordability
The Washington Post recently reviewed housing affordability nationwide. Atlanta proved to be one of the most affordable cities, where a salary of $40,000 allows one to own a home. In Washington, DC, however, you need to earn more than twice as much to own a home. On the other side of the country, the difference is even starker. Sacramento requires a salary of $65,000 as opposed to San Francisco where you need to earn $162,000 annually.
Prices rise disproportionately in cities like San Francisco. Other desirable areas have housing prices rising at a more reasonable rate. These numbers factor in principal, interest, taxes, and insurance. The Post, like many financial advisers, assumed that a household should spend no more than 28% of income on housing expenses. A 20% down payment was assumed.
As housing prices rise in the most desirable areas, people are pushed to the margins. Longer commutes and higher prices in suburban areas conspire to push homeowners further away from the urban centers in which they work. Eventually, the choice becomes an unbearable commute versus giving up on the American Dream and renting a home.