Home Ownership in America – A Fading Dream?

The American dream of home ownership might be fading. For decades, the government has tracked the difference between renting and owning. The Federal government recently published its latest home affordability index, which measures the cost of home ownership versus renting. The results are staggering. Last year, the national average rent was $1,805 per month, while the average cost of homeownership was $2,861. This difference of $1,056 is the widest spread difference ever recorded.

When we apply the general rule of thumb suggested by mortgage lenders like Fannie Mae, a family should keep their cost of homeownership to 30% of income. That would mean the average monthly income needed for the average home is $9,536. The Atlanta Fed recently reported that last Fall, the median homeowner is currently paying 43% of their income on home ownership costs. Four years ago, that percentage was 28%.  Most costs associated with home ownership continue to rise, as reported around the county, with interest rates, insurance, and real estate tax increases at the top of the list.

Another surprising fact is that the median age of a first-time home buyer in the US last year was 38 years old, according to the National Association of Realtors. That is 5 years older than it was in 2021. In 2010, 50% of home buyers were first-time buyers. That number last year was 24%. Demographics in the housing market reflect the fact that Millennials are getting married later and postponing having children. They are also more prone to remote work and the flexibility to relocate to other cities, all leading them to delay the decision to purchase a home.

Growing damage from wind, water, and fire has caused insurance costs for homeowners to skyrocket in certain markets. There are growing reports of some insurers completely abandoning certain markets due to the risks. If you have needed any repairs to your home in recent years, you will also be aware of the rise in costs for all those projects that come with home ownership.

So, how can home affordability improve? The simple answer is that we need lower mortgage interest rates and a large increase in the supply of houses. The supply could come from existing owners needing to sell, but many existing homeowners are trapped in low-interest mortgages, and they know if they sell their existing house, the replacement home will carry a higher interest rate. Homebuilders could build more, but higher borrowing rates and construction costs do not lead to homes being more affordable. The current uncertainty about the economy, markets, and budget deficits makes for more volatility surrounding the world of interest rates. For these reasons, the sad truth is that the dream of home ownership is not going to get easier any time soon.

Carl Gambrell