Housing became increasingly unaffordable in 2020
“The future remains wholly uncertain...but for now, things are going in the wrong direction for buyers”
To many, owning a home is still The American Dream. However, homeownership is becoming increasingly unaffordable for large swaths of workers in 2020, a trend that COVID-19 accelerated.
According to a study by ATTOM Data Solutions, a property data company, 55% of the 500 counties it analyzed were less affordable than in 2019. This is up 22% from three years ago. A driver of this phenomenon is that home values are rising much faster than wages, the study concludes.
“Owning a home in the United States slipped into the unaffordable zone for average workers across the nation as the numbers continued a year-long slide in the wrong direction,” Todd Teta, chief product officer with ATTOM, said in a statement.
“That’s happened as home prices have continued rising throughout 2020 and the housing market has remained remarkably resilient in the face of the brutal economic fallout from the Coronavirus pandemic. The future remains wholly uncertain and affordability could swing back into positive territory. But for now, things are going in the wrong direction for buyers,” he added.
Demand is Sky High
Comparing wages and home values is an overly simplistic way of measuring housing affordability. Having the money to purchase a home doesn’t guarantee one the opportunity to do so.
Right now, the housing market is at peak competitiveness. While this is often good for sellers, it can be a costly game for renters and first-time homebuyers who are more susceptible to bidding wars.
Research by Zillow found the 2007–08 recession created over 5.7 million “missing households” — people who historically would have moved into their own home but have been unable or unwilling to do so. Coupled with a large portion of the millennial generation reaching home-buying age, these factors have sustained demand for housing for the last 12 years.
During the pandemic, the housing market continued to post stellar numbers. Year-over-year, the national average home value is up 7.5% to $263,000 while monthly sales are through the roof. Zillow projects it will increase by another 10.3% by the end of 2021.
(Un)Friendly Capital Markets
Housing affordability also relies on friendly capital markets. Both developers and potential homebuyers need easy access to debt.
At the same time, wages are rising across the country. While this bodes well for workers, it often acts as a double-edged sword.
Known as Parkinson’s Law, people tend to spend more of their earnings as wages rise. Oftentimes, people also borrow more from creditors, leaving a smaller war chest for financial emergencies or investment opportunities.
For the foreseeable future, the historically-low interest rates alone will help sustain home values and drive demand. Analysts at All of the major mortgage players anticipate keeping interest rates around 3% for a 30-year loan throughout the year.
However, ATTOM’s study found the average US worker is unable to meet the 28/36 rule used by lenders, and, therefore, can’t capitalize on these favorable market conditions.
The 28/36 rule states that a homeowner should pay no more than 28% of their gross monthly income on housing expenses, and more than 36% of their total debt service.
According to the Economic Policy Institute, the average US wage in 2019 was $19.33 per hour or around $40,000 annually. A worker making this wage could spend no more than $933 per month on housing expenses to comply with the 28/36 rule. This sum must include mortgage payments, insurance, and property taxes.
If the average worker is unable to put a 20% down payment on a home, it’s highly unlikely they would avoid mortgage insurance, making compliance even more unattainable.
ATTOM’s study revealed that in three-quarters of the 500 counties analyzed, the average wage needed to afford a home was over $75,000.
Maybe the most troubling sign for the average US worker is that there is no sign of the housing market slowing down any time soon.
Analysts anticipate big things from the housing market in 2021. Increased competition, low-interest borrowing, and rising wages are a pyre for increasing home values.
However, these factors could also force the average US worker into a smaller home with a higher monthly payment, an impact low-interest rates would only slightly blunt. The pandemic has driven demand for housing through the roof as homebuyers and investors compete to capitalize on the market.
“The sooner we can put the pandemic and 2020 recession behind us, the sooner access to housing can resume its expansion,” said Zillow senior economist Jeff Tucker.