What this article covers
Opher Ganel walks through Harvard’s Joint Center for Housing Studies report on the state of the nation’s housing and runs the numbers on what it takes to afford rent or a mortgage. He finds that while price and rent growth have slowed, falling demand, rate-locked homeowners and lagging construction make a broad drop in housing costs unlikely, especially at the lower end of the market. Three financial advisors add practical ways buyers can still get in the game.
Key Takeaways
At 8% mortgage rates, a household earning $61,000 can afford a home priced around a third of the national median
Keeping principal, interest, taxes and insurance under 30% of gross income caps borrowing at about $167,000, and needing PMI with less than 20% down pushes the affordable price to roughly $152,000. On the rental side, the $1,800 median rent for newly built multifamily units takes 30% of a $72,000 gross income, and nearly half of renter households spend more than 30% of income on housing.
Home prices are unlikely to fall much because rate lock-in is choking supply
Price growth slowed to 2% from February 2022 to February 2023, but homeowners holding ultra-low mortgage rates have little reason to sell. In Opher’s example, a homeowner with a 3% loan who moves to a median-priced home at 8% would see the monthly payment rise 70% to 84% or more, so few list their homes and supply stays tight.
New construction is helping affluent renters, not lower-income households
Single-family building slowed in 2022 and starts of homes under 1,800 square feet fell to 24% of the total, while multifamily starts hit their highest level since the mid-1980s. Vacancies are rising mostly at the high end, so lower-cost housing stays scarce, and one advisor argues policy support such as subsidized housing and down payment assistance is needed alongside private development.
And how much you need to earn to afford housing…
Unless you’ve been hiding under a rock for years, you’ve seen it and may well be struggling as a result.
Housing prices have shot through the roof over the past several years. Asking rents also soared.
According to a report from Harvard’s Joint Center for Housing Studies of Harvard University titled, “The State of the Nation’s Housing,“ despite recent slowdowns, “… home prices and rents remain elevated from pre-pandemic levels. Millions of households are now priced out of homeownership, grappling with housing cost burdens, or lacking shelter altogether, including a disproportionate share of people of color, increasing the need for policies to address the national housing shortfall at the root of the affordability crisis.”
The report digs deeper, showing a rather grim picture.
How Much Do You Need to Earn to Afford Rent or a Home?
Newly completed multi-family units were priced, as of 2022, at a median of $1800 rent. If you make under $72k, that rent would be 30% of your gross income. While that’s the line often used to determine the most you should pay for housing, that doesn’t make it easy to afford.
If you make $61k, just a bit over twice the federal poverty limit for a family of four, any rent higher than $1525 would be higher than 30% of your gross income, counting you as housing burdened.
As for buying, with 30-year loans at 8.0%, assuming the national average property tax rate of 1.11% and say $100 monthly homeowners insurance premium, the most you should borrow would be $167k, to keep your monthly mortgage payments, including principal, interest, taxes, and insurance (PITI) under 30% of gross income.
That means you can afford less than half the median home price, assuming you somehow come up with a 20% down payment. If you find a loan requiring substantially less, you’d have to pay Private Mortgage Insurance (PMI), reducing the amount you can borrow even further.
In this scenario, the most you could afford would be a home priced around $152k, just about a third of the national median.
This explains why first-time homebuying dropped like a rock in recent months.
It also explains why nearly half of households who rent spend over 30% of their gross income on housing, and more than 1 in 4 spend over half their gross income!
For homeowners, the picture is a bit less bleak, just under 1 in 4 spend over 30% of income and 1 in 10 spend above 50%.
Unsurprisingly, the picture is far grimmer for low-income Americans – 85% of renters earning under $15k are housing burdened, as are 81% of those earning $15k – $30k, 63% of those earning $30k – $45k, and 34% of those earning $45k – $75k.
However, while things aren’t great, they’ve recently stopped getting worse…
Are Home Prices and Rents Finally Slowing Down?
From Feb 2022 to Feb 2023, home prices went up 2%. That’s much better than the 20.1% increase seen the previous year.
Better yet, July 2022 showed the first month-over-month decrease in more than 10 years. Prices in Feb 2023 were nearly 3% below their recent peak. In fact, 3 of 4 markets tracked by Freddie Mac showed a year-over-year decrease.
Typically, changes in rent lag changes in home prices by 9–12 months, with smaller changes (either up or down).
In early 2023, however, year-over-year increases in asking rents for professionally managed apartments plummeted from their early 2022 peak of 15.3% to 4.5%, paralleling the drop in purchase price increases.
A small minority of markets showed actual rent declines, e.g., Phoenix, AZ, and Tampa, FL, both of which saw prior year increases of over 25%.
This relief is small comfort to those seeking housing, given the 23.9% increase in asking rents for professionally managed apartments over the three years from early 2020 to early 2023; and the 37.5% increase in the median sale price for existing homes.
Given all this, can we expect the picture to improve in the near future?
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Will Falling Buyer Demand Bring Home Prices Down?
Home prices are driven, as are most things in a free market, by supply and demand.
As shown above, high prices and high mortgage rates (the national average rate as of this writing hit 8.0%) combine to make homebuying unaffordable to millions of households. This should pressure home prices downward.
However, while demand has nearly dried up, so has supply (more on this below).
According to Zillow, there are only 12 homes actively for sale in my entire zip code area (ignoring “coming soon” and “new construction” that’s not built yet).
And that’s for any type, size, and price home!
In the past 30 days, 17 homes were sold.
That means the sales-to-active ratio (SAR) is 1.41, over 7-fold higher than 0.20, the line between a seller’s market and a balanced one.
Said differently, to get this market into balance, we’d need to see demand drop down to just 2 homes sold in a month (assuming supply doesn’t change)!
Given that there are so few homes available for sale, and none has been on the market for more than 65 days, we’re unlikely to see the number sold drop so significantly. Indeed, we should expect all 17 homes to sell in the coming few weeks.
If demand is unlikely to save us, how about supply?
Will More Homes for Sale Bring Prices Down? Why Mortgage Rate Lock-In Says No
For this to happen, we’d need to see over 120 homes actively for sale (assuming demand doesn’t change)!
That’s more likely than seeing closings drop to just 2. However, “more likely” does not equal “likely”!
With so many homeowners “locked in” by their ultra-low mortgage rates, supply is even lower than demand, propping prices up.
Want to know why? Check out this example scenario…
Example: Why Low-Rate Homeowners Can’t Afford to Move
Say you bought a home 13 years ago at the then-median price of $224.1k. You put 20% down, borrowing $179.3k at the then-average mortgage rate of 4.32%.
Two years ago, you realized rates had dropped and refinanced at 3%, rolling closing costs of $5000 into the loan on top of the $138.2k payoff balance of the old loan. Your loan payment PITI dropped to $1154.
Now that two more years have passed, you want to move elsewhere to another property, that’s going for the current national median price of $431k. To do this, you plan to sell your current home, for the same $431k. Your payoff balance is $137.1k, and your closing costs are 10% of the sale price, leaving you $250.8k in hand.
Let’s look at two options.
- You plow the entire $250.8k into the new purchase, and with $12.9k closing costs, you’ll need to borrow $193.1k. At 8.0%, making your new payment (PITI) $1967, or 70% higher than your current mortgage payment!
- You put only 20% down plus the $12.9k closing costs, so you have to borrow $344.8k, which at 8.0% means your new payment would be $3080, or 2.66× your current payment!!! If you invest the portion of proceeds left over (since you only put $86.2k down) and get a 7% annual return, the $960 average monthly return partially offsets your higher mortgage payment. Still, your net would be 84% higher than your current payment!
How likely do you think it would be for you to jump on such a deal? No?
Didn’t think so.
Unless you’re forced to move for some reason, you’re unlikely to put your house on the market. Neither would others, so, supply is unlikely to increase much, let alone the 7-fold increase needed for the market to balance.
Will New Construction Make Housing More Affordable?
Here, we need to separate single-family from multi-family housing.
The former, according to the Harvard report, has slowed. The long-term average rate of building single-family homes is 1.0 million a year. In 2021, single-family housing starts ran at about 1.14 million. In 2022, due to high costs and high mortgage rates, it was just 876k.
And this is while we need an estimated 5-6 million housing units to meet demand.
Worse yet, the decrease hits low-cost housing most, driving average costs even higher. Just 113k manufactured homes were shipped in 2022 vs. over 200k typical annual levels in the 1980s and 90s, and just 24% of new starts were sub-1800 square feet vs. 37% in 1999.
For multi-family housing, the picture is slightly rosier. For renters. Affluent ones.
Despite softening in asked rents, 547k units were started in 2022 – the highest since the mid-1980s. In terms of units under construction, the 960k units as of March 2023 are the highest number since the mid-1970s.
It hasn’t happened yet, but we may see a slowdown in these banner numbers, given increasing vacancy rates. However, vacancies are high, mostly on the high end of the rent-cost spectrum, with lower-cost housing supply remaining tight.
This bodes well for affluent renters, but promises continued challenges for lower-income people.
How to Afford a Home When Prices Are High: Advisor Tips
If you’re wondering what you can do as someone who wants to buy a home, Alec P. Tuckman, CEO & Wealth Manager, Wealth Management Partners of Los Angeles has some advice:
- “Consider buying a ‘fixer’ property or ‘ugly’ home you can gradually rehab.
- Consider a townhome or condo to ‘get in the game.’
- Consider a duplex instead of a single-family home.
- Consider a more socially challenged, up-and-coming neighborhood that you can afford.
- Be patient and save more for a down payment.
- Improve your credit score to get a less exorbitant interest rate.
- See if any rich relatives or parents can help with the down payment.
- Make sure you have the two years of check copies and income you can show.”
Ellen Masters, Financial Advisor, Masters Financial, LLC adds:
The average size of homes keeps increasing as our standards for what we need in a home grow, magnifying costs even more. If you’re struggling to find an affordable home, consider a smaller place, especially if there are just two of you – beyond a lower mortgage, you’ll pay less on utilities and taxes too.
The Bottom Line: Why Housing Is Likely to Stay Expensive, Especially for Lower-Income Households
Housing has always been the biggest cost for American households, but recent years drove costs for both buying and renting sky-high.
Unfortunately, high mortgage rates coming so quickly on the heels of the lowest rates in decades are locking current homeowners, dramatically cutting the supply of existing homes. High rates and high costs are making homebuilders cut back at a time when the country needs millions of homes to meet demand and bring prices back to sanity.
And while multi-family units are being built at the highest pace in half a century, that’s mostly at the high end of the rent spectrum, implying that wealthier renters will do fine, but lower-income ones will continue suffering.
As Jorey Bernstein, Executive Director, Wealth Manager, and Founder, Bernstein Investment Consultants says:
Increasing housing supply through new construction can help restrain prices in high-demand areas, but we can’t rely on the market alone for affordable housing at all income levels. We need policies promoting subsidized affordable housing, down payment assistance, and tenant protection. The future requires a mix of private development and public programs working together to promote housing affordability across the income spectrum.
Frequently Asked Questions
Will home prices go down soon?
The article argues a big drop is unlikely. Demand has fallen because of high prices and mortgage rates, but supply has dried up too, since homeowners locked into ultra-low rates rarely sell and builders have cut back on single-family homes.
How much income do you need to afford rent?
Using the common rule of keeping housing at or below 30% of gross income, the $1,800 median rent for newly completed multifamily units requires about $72,000 a year. A household earning $61,000 would be housing burdened at any rent above about $1,525 a month.
What is mortgage rate lock-in and why does it keep housing supply low?
Rate lock-in happens when homeowners with very low mortgage rates would face far higher payments if they sold and bought again at today’s rates. In the article’s example, moving from a 3% loan to an 8% loan on a median-priced home raises the monthly payment by 70% or more, so most owners stay put unless forced to move.
Will new construction make housing more affordable?
Only partly. Multifamily construction is at its highest level in decades, but much of it is at the high end of the rent spectrum, while single-family and manufactured home building has slowed. That bodes well for affluent renters but leaves lower-income households facing continued challenges.
How can first-time buyers afford a home when prices are high?
One advisor interviewed suggests considering a fixer-upper, a townhome, condo or duplex, or an up-and-coming neighborhood, along with saving more for a down payment and improving your credit score. Another advisor recommends considering a smaller home, which lowers the mortgage as well as utilities and taxes.
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Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.
About the author
Contributing Writer, Wealthtender
My career has taken some unexpected turns, from earning a PhD in experimental high-energy physics, to conducting cosmic-ray research in Antarctica, to supporting NASA projects and programs, to running my own consulting business. I also run several other small businesses and help my wife run her Marriage and Family Therapy practice.
Those experiences taught me to question assumptions, think critically, and recognize that real-world decisions of any significance rarely have simple answers that apply to everyone. Today, I bring that perspective to writing about personal finance. Drawing on my analytical background, business experience, and research, I explore financial decisions, challenge conventional wisdom, and help readers understand the tradeoffs that can affect their financial well-being. To complement my own research and experience, I also weave insights from financial professionals into my articles, drawing on their expertise and real-world experience helping clients navigate financial decisions and challenges.
At medium.com/@opher-ganel, you can read more of my articles and subscribe to receive email notifications when new ones come out.