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Does the Future Promise Cheaper Housing? Here’s What Harvard Researchers Say

By 
Opher Ganel, Ph.D.
Opher Ganel is an accomplished scientist (particle physics), instrument designer, systems engineer, instrument manager, and professional writer with over 30 years of experience in cutting-edge science and technology in collider experiments, sub-orbital projects, and satellite projects.

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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.

Housing Is Unaffordable (or Nearly So) for Millions

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…

Image Credit: Depositphotos.

Somewhat Hopeful Recent Changes in Purchase and Rent Prices 

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?

Should We Expect a Big Reduction in Home Prices Due to Decreased Demand?

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?

Should We Expect a Big Reduction in Home Prices Due to Increased Supply?

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…

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 Save Us?

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.

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

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.

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This article originally appeared on Wealthtender. To make Wealthtender free for our readers, we earn money from advertisers, including financial professionals and firms that pay to be featured. This creates a natural conflict of interest when we favor their promotion over others. Wealthtender is not a client of these financial services providers.

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

Opher Ganel, Ph.D.

My career has had many unpredictable twists and turns. A MSc in theoretical physics, PhD in experimental high-energy physics, postdoc in particle detector R&D, research position in experimental cosmic-ray physics (including a couple of visits to Antarctica), a brief stint at a small engineering services company supporting NASA, followed by starting my own small consulting practice supporting NASA projects and programs. Along the way, I started other micro businesses and helped my wife start and grow her own Marriage and Family Therapy practice. Now, I use all these experiences to also offer financial strategy services to help independent professionals achieve their personal and business finance goals. Connect with me on my own site: OpherGanel.com and/or follow my Medium publication: medium.com/financial-strategy/.


Learn More About Opher

To make Wealthtender free for readers, we earn money from advertisers, including financial professionals and firms that pay to be featured. This creates a conflict of interest when we favor their promotion over others. Read our editorial policy and terms of service to learn more. Wealthtender is not a client of these financial services providers.
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