Locked Out
Why the housing affordability crisis could last another decade...
“I don’t want to survive. I want to live. And I want to buy a house.”
~ Wall-E
Joel Bowman with today’s Note From the End of the World: Buenos Aires, Argentina…
We’re on the move today, dear reader… heading to the airport for a last minute trip to Puerto Iguazú, in northeastern Argentina, to see the mighty falls.
When Eleanor Roosevelt visited the site in 1944, as part of a South American tour, she reportedly exclaimed, “Oh, my poor Niagara!”
We’ll let you know our impressions when we return in a few days…
In the meantime, what’s going on with the affordability crisis in US housing? Guest columnist MN Gordon, himself a “California Refugee” who took up residence in picturesque Tennessee a few years ago, has a few insights in today’s Note, below. Please enjoy…
Oh, and by the way, if you’d like to see more of Gordon’s fine work, do be sure to check out his Economic Prism website, right here. We have no financial arrangement with our long time contributor and do not benefit from featuring his writing... other than that we simply enjoy what he has to say and hope you do, too.
Cheers,
Joel
Locked Out
by MN Gordon, Founder of Economic Prism
The U.S. housing market is currently stuck in a morass of rising mortgage rates, low sales, increasing inventory, and stubbornly elevated prices. If you’re a middle-class earner trying to buy your first home right now, a quick entry into a monthly payment calculator will deliver a heavy dose of disappointment.
What’s going on? Shouldn’t house prices be declining in response to rising inventory? Isn’t that how supply and demand are supposed to work?
Moreover, it’s not just 7 percent 30-year fixed rate mortgages that prospective house buyers must contend with. There’s rising property taxes and soaring insurance that are also contributing to housing being completely unaffordable.
To understand why the housing market is sick, you must look back to the days of the faux pandemic. If you recall, after massive intervention by the Federal Reserve, mortgage rates hit historic lows below 3 percent.
Millions of buyers and millions of existing homeowners who refinanced locked in those remarkable rates. Borrowing costs were nearly free. And the ultra-cheap credit drove house prices to record highs.
Yet today, after a bout of rampant inflation and mega amounts of deficit spending, 30-year fixed rate mortgages are near 7 percent. High mortgage rates and high house prices have pushed homeownership out of reach for median income households.
Imagine you want to buy a $500,000 home with 20 percent down. At a 3 percent interest rate your monthly principal and interest payment is $1,686. At a 7 percent interest rate that exact same house costs you $2,661 a month.
What’s more, this is before property tax, home insurance, and any Homeowners Association (HOA) dues. Depending on where you live, this could add $500 or more to your monthly payment.
Golden Handcuffs
Considering just the monthly principal and interest payment, the difference between a 3 percent and a 7 percent mortgage on a $500,000 home is nearly $1,000 a month. In other words, it costs about 58 percent more today for the exact same four walls and a patch of grass than it did 5 years ago.
If you bought in 2021 and are sitting on a 3 percent rate, moving to a new home today means hiking your interest rate by roughly 400 basis points. Why would anyone voluntarily trade a 3 percent mortgage for a 7 percent mortgage?
They wouldn’t.
This is the golden handcuffs phenomenon. Existing homeowners with 3 percent mortgages have massive equity and dirt-cheap payments, so they have no reason to sell.
At the same time, with many potential new buyers being priced out of the market, and there being weak demand, it would be logical to expect prices to decline in turn. Increasing supply and lower demand should equal falling prices. But that’s not exactly what’s happening.
Instead, we’ve got this mixed housing market bag occurring across the country. In some cities, inventory is starting to build up, but prices refuse to fall – or if prices are falling, they’re nowhere near where they were in 2021. As far as we can tell, this is happening for several reasons.
While demand is weaker than several years ago, there’s still a massive cohort of Millennials and Gen Z who are in their prime homebuying years. They need places to live and are willing to be house poor to make it work. Thus, there is enough buying to keep prices from substantially falling.
In addition, because current homeowners have no financial incentive to sell, they would rather take their homes off the market than slash their asking prices. This false inventory puts a floor beneath home prices.
Sneaky Killers
High mortgage rates and high house prices are not the only challenge homeowners are up against. There are also property taxes and homeowners’ insurance.
Even if you manage to scrape together a down payment and can cover the monthly principal and interest payment on a 7 percent mortgage, the hidden costs of homeownership can put the American Dream out of reach.
Across large swaths of the country – including high-growth states like Texas, Florida, and parts of the Sunbelt – home insurance premiums have absolutely exploded. Driven by severe weather events, wildfire risks, and inflationary spikes on building materials, insurance companies are either exiting certain markets entirely or hiking rates by double digits year-over-year.
Concurrently, local governments have reassessed property values based on the massive price spikes of the last few years. As a result, property tax bills have gone up too.
However, the financial burden does not stop with taxes and insurance. Many residential neighborhoods include costly HOA dues. As the development and maintenance costs for subdivisions and planned communities skyrocket, HOAs are forced to pass these expenses directly to residents through hefty monthly fees or surprise special assessments.
On top of fees, ongoing individual maintenance costs add significant strain to household budgets that can barely meet committed obligations. It is fair to assume at least 1 to 2 percent of a home’s total value annually for routine upkeep, repairs, and capital replacements. The costs for fixing a leaky roof, replacing an aging HVAC unit, or maintaining plumbing systems quickly add up.
Unlike renting, where the landlord absorbs emergency repair costs, homeownership leaves you entirely responsible for every unexpected breakdown. These unexpected repairs seem to happen much more frequently than one would anticipate.
When you bundle a 7 percent mortgage with soaring insurance premiums, rising tax burdens, expanding HOA dues, and endless maintenance requirements, the true monthly carrying cost of a home overwhelmingly exceeds middle-class purchasing power.
No Relief in Site
We don’t expect lower mortgage rates anytime soon. Not with consumer price inflation running hot. And if, somehow, lower rates were to return, what good would they do? This would merely serve to buoy up prices even more.
Perhaps a massive surge in new home construction could flood the market with affordable inventory. Some builders are trying. But from what we’ve observed they’re not building starter homes for the middle class. Rather, they’re building higher margin McMansions, which don’t address the affordability problem.
Given these circumstances, unless there’s a substantial recession, it could take a decade or more for house prices and wages to better align so that buyers can better cover the cost of homeownership. This will be slow and painful, and disappointing for young families trying to get a place of their own.
In the interim, the U.S. housing market is stuck. Buyers can’t afford the payments, sellers won’t give up their low rates, and builders aren’t constructing lower priced starter homes to bridge the gap. For many people, the numbers don’t pencil out.
Unless something gives, a generation of potential homeowners will remain locked out in the cold. For them, the traditional American Dream is officially dead.
So, where does this leave you if you’re sitting on the sidelines, with a solid income that still cannot afford the realities of this difficult housing market?
By all accounts, it’s a frustrating game right now. There’s no shame in renting and for many people this is the better option. It certainly beats getting crushed by a mortgage you can barely afford.
Alternatively, refocus your sites off the beaten path. You may find your opportunity in a smaller flyover city – one with an ample supply of water – than the big high-priced cities on the coasts.
Quite frankly, when the everything bubble finally bursts, and the populace goes absolutely mad, smaller hamlets outside of major population centers will be the place to be.
Kind regards,
MN Gordon, Founder of Economic Prism
Joel’s Note: We’ve heard similar stories from friends in Australia, the UK, Canada and elsewhere. Seems like a common problem across much of the post-pandemic landscape…
What’s the story in your ‘hood? We’d love to hear your boots-on-ground insights in the comments, below…
My daughter is a 25 year old engineer working in Iowa. She is single. so just needs a starter home, but there's nothing like that available. Either 4/3's or total fixer upper's that she doesn't have time or skill for. We are investigating the possibility of buying a lot, digging the basement, and having utilities run and putting a manufactured 3/2 on the foundation. I think we can do this for about $125/sq ft, so a 2200 sq ft 3/2 (quite spacious for a single gal) would be $275K plus the cost of the lot. If the lot is $25,000 and that's also her down payment, then her note is just under $2K/month plus insurance and taxes. That would still consume 40% of her take-home pay. Her 2 bedroom apartment is quite nice and is $1200/mo. so she's staying there for now...
When I bought my first house, my monthly house payment was $176 a month and my taxes were about $30 per month. In my current house, which I own outright, my taxes are more than double my house payments in my first house at more than $300. Approximately the same square footage except the current house is over a basement. Same part of the same county and state-Athens GA. There are at least two problems in play here, one is the corrosive growth of government in our state and country, and second is the continuous devaluation of our currency through inflation. The only solution I can see is a return to constitutional currency (money), which is gold and silver.
Great update Joel!