HOUSING

Why You Can’t Afford to Buy a House

It has nothing to do with you.

Housing is awfully expensive. (Photo by **Dovis** from **Pexels**)

I have written a few articles about the benefits of buying a house even in the current high-priced economy. Those articles ring true if you can actually afford a home, but what about everyone else?

Story after story has been published about potential home buyers, most often first timers, being out vastly outbid in less time than it took to even submit an offer.

The demand for homes is damn near insatiable, but why is that? Home builders constructed 1.3 million housing units in 2020, which sounds like it should meet the demand, right?

Let’s take a look at the numbers to see what they’re really telling us, including:

How did we get here?
How big is the problem?
How do we solve it?

How Did the Housing Supply Tighten So Much?

I have written the brief synopsis below in a previous article, but it’s worth repeating here.

After the housing bust in 2008, many home builders went bankrupt, got bought out/merged with another company, or decided to just get out of the game completely.

The remaining companies decided not to repeat history with mass production of low- and middle-income houses, and instead focused on high-end, high-margin custom homes.

[The current situation] is the polar opposite of what the company faced during the subprime bust that began around 2007, when the housing market was gripped with a massive oversupply problem that took almost a decade to correct.

Construction of new homes collapsed in the aftermath of that crisis and never recovered. The supply of new homes remains very low today.

“We’ve been under-building for the last 15 years,” said Jeffrey Mezger, CEO of KB Home.

The inventory vacuum this situation created was able to go unnoticed by so many Millennials opting to live at home or with roommates, delaying the milestones of marriage and children, both of which are drivers of home buying.

From a recent report, “the number of adults aged 25 to 34 years living at home with parents surged by 2.5 million since 2010 and more than doubled from 2000 to 2020, increasing by 4 million people.”

That’s 2.5 million fewer people wanting homes, shifting the historical economics of home builders.

Overall, the economy was starting to gain steam in 2019, and those Millennials were ready to flex their newfound financial muscle, accumulated from all those years avoiding the cost of homeownership. However, COVID hit in 2020 and put the brakes on those plans.

COVID also caused lumber mills to hit the brakes, reducing supply when millions of Americans decided to take up renovations or hobbies requiring lumbers, creating a historic shortage of dimensional wood.

When everyone and their mother (including me) decided that renting during a pandemic was horrible and wanted to buy a house, the cost of wood and other materials had added tens of thousands of dollars to the cost of a new house.

This extra cost pushed would-be buyers of new homes to the already tight market for existing homes. Add in the fact that Millennials are now fighting Gen Z for a rapidly shrinking piece of the single family pie, and you get prices going into the stratosphere.

The oldest subset of millennials graduated from college right as the economy went into a recession, which has presented career- and income-related hurdles that have delayed other life milestones.

Gen Z, on the other hand, is coming of age during an upswing in the economic cycle and benefiting from that.

Now that we know that cause(s), let’s take a look at the size of the problem.

Just How Bad is the Housing Shortage?

Anecdotal evidence will say that the shortage is a complete disaster, derailing life plans for two generations and irreversibly shifting the real estate market. Is that hyperbole, or is there truth to that?

Research by Freddie Mac

The smaller of the two government sponsored entities, Freddie Mac not only provides lenders a federal guarantee on mortgages, but it also performs some quite interesting research on the side.

From a report in May 2021:

Our estimates suggest that the [housing] shortage has increased 52% from 2.5 millions [houses] in 2018 to 3.8 million in 2020.

This is a huge number of extra houses to build, given that only 1.3 million housing units were constructed in 2020.

How did Freddie Mac arrive at this number? The Wall Street Journal did some digging and found the answer.

Freddie Mac reached its shortage figure by assessing the amount of single-family home building needed to match demand from household formation, second-home purchases, and replacement of damages or aging U.S. homes, and comparing that with the pace of construction.

This gives us quite a bit of insight, reminding us that not every home built goes up for sale as an owner-occupied unit for a family. Sometimes it goes to someone who wants a lake house. Or it is sold as an AirBnB.

And not all of the demand is due to wanting a better place to live. Sometimes homes become completely uninhabitable, due to outright neglect, natural disasters, etc.

Research by NAHB

Another research paper, this one commissioned by the National Association of Home Builders, paints an even starker picture. Here’s the introduction:

Following decades of underbuilding and underinvestment, the state of America’s housing stock, which is among the most critical pieces of our national infrastructure, is dire, with a chronic shortage of affordable and available homes to house the nation’s population.

The housing stock around the nation has been widely neglected, with a severe lack of new construction and prolonged underinvestment leading to an acute shortage of available housing, an ever-worsening affordability crisis and an existing housing stock that is aging and increasingly in need of repair — all to the detriment of the health of the public and the economy.

The scale of underbuilding and the existing demand-supply gap is enormous and will require a major national commitment to build more housing of all types by expanding resources, addressing barriers to new development and making new housing construction an integral part of a national infrastructure strategy.

They are definitely not mincing words here.

NAHB estimates that home construction needs to be at 1.5 million just to keep up with demand. Notice that is more than the current 1.3 million units built in 2020, meaning demand was already outstripping supply.

On top of that is another 5.5 million units that needs to be built over the next 10 years, adding an additional 550,000 units to the annual rate. And that’s just accounting for traditional growth.

Add in the “loss of existing units, through demolition, natural disaster or functional obsolescence”, and that number climbs to 6.8 million units, or 680,000 per year.

The Vacancy Twist

To add a little spice to the conversation, we need to address the millions of vacant housing units across the country. As of the most recent Census Bureau report, there are currently 15.6 million housing units that are completely vacant.

You might be wondering, “If there are so many vacancies, why can’t we just use those to make up the difference?”

The answer is that you need vacancies for a properly functioning market.

Think of it this way. In manufacturing, and most processes really, you never want to run at 100% capacity. Rather, you aim for about 85%, which allows you to absorb any peaks you may encounter.

NAHB uses a vacancy target of 13%, meaning the housing market operates at 87% capacity. (I couldn’t find NAHB’s reasoning behind the 13%, other than it’s a holdover from previous analyses.)

The current 15.6 million vacancies currently put the vacancy rate at 10.9%. As mentioned above, vacancies not only include units for sale and for rent, but also those already rented or sold but not occupied (940,000), second and/or vacation homes (3,200,000), and “other”, which includes AirBnB/VRBO homes (3,783,000).

Excluding all these other categories leaves only 3,179,000 units for rent and a mere 735,000 units for sale, out of a total vacancy inventory of over 15 million, or 4.7%

This means that for every new construction house available for sale, another 20 units need to be built for other purposes.

That’s a ridiculous ratio, but it illustrates just how hard it is to create new homes in this economy.

What is the Solution?

Ideas vary, but here are the top contenders.

Increased income
Government assistance
Everyone becomes a renter

Pay People More So They Can Afford Higher Priced Mortgages

Already, no minimum wage employee can “afford” rent anywhere in America. Hell, even average wages can’t afford rent.

The report, released Tuesday, defines “affordable” as spending no more than 30% of monthly income on rent, in line with what most budgeting experts recommend. Nationally, NLIHC puts the “housing wage” for 2020 — or what a full-time worker must make in order to afford a fair market rental without spending more than 30% of his or her income — at $23.96 per hour for a two-bedroom rental and $19.56 per hour for a one-bedroom.

That means even the average hourly worker who earns $18.22 per hour cannot afford rent, the report says. Many workers deemed essential during the coronavirus pandemic earn even less. “Grocery store cashiers earn a median wage of $11.61 per hour, while building cleaning workers and home health and personal care aides earn $12.94,” per NLIHC.

Let’s face it, wages have been artificially depressed for decades, but inflation keeps prices going up regardless. The bifurcation of the American economy is doing more harm than good, to the point where even a 40-hour workweek isn’t enough to put a roof over your head, much less food on your plate.

Raising the minimum wage to $15/hour might be a good start. There will be trickle down inflation to be sure, but it would definitely benefit many people who are otherwise unable to pay for shelter of any kind.

(More) Subsidized Housing?

There are two main programs to help families with housing.

The first is Temporary Assistance for Needy Families (TANF), colloquially know as welfare. This is cash assistance to families, allowing them to spend it on whatever they need, including housing. Many decide to use the money towards housing, as it’s tough to do much else without shelter.

The second program is the Housing Choice Voucher Program, also known as Section 8.

From HUD:

The housing choice voucher program is the federal government’s major program for assisting very low-income families, the elderly, and the disabled to afford decent, safe, and sanitary housing in the private market. Since housing assistance is provided on behalf of the family or individual, participants are able to find their own housing, including single-family homes, townhouses and apartments.

The participant is free to choose any housing that meets the requirements of the program and is not limited to units located in subsidized housing projects.

This sounds good on the surface, but the problem is that not all landlords take Section 8 vouchers, minimizing options for recipients.

To either replace or add to these programs, many advocates are calling for Universal Basic Income (UBI) to cover the necessities of living. The idea of UBI intially became popularized during the time of MLK and Nixon, with a recent resurgence primarily due to Andrew Yang’s presidential run during the Democratic primary.

This option would help a larger population than an increased minimum wage, since every person over 18 would receive a monthly stipend regardless of employment (or any other) status.

Advocates claim it will eliminate poverty, homelessness, and hunger.

Detractors claim it will inflate prices to be even more out of reach for all but the wealthy.

Become a Nation of Renters

Articles are supporting this idea, and home builders (and their financiers) are making it happen. Single family rental (SFR) homes are being newly constructed to be sold to hedge funds, then rented out, never being owner-occupied.

Entire neighborhoods are being created for this very purpose.

While it kind of solves the demand for single family housing, there will be some unintended consequences.

What happens when the houses are run down and the landlords want to sell them to private owner/occupiers?
While a house is not really an asset, renting does eliminate the forced savings of a mortgage.
You miss out on many of the legal benefits (e.g. property rights) of owning a home.

Increasing the number of rentals may be a short-term fix, but I don’t see this type of solution as benefiting the average American.

The Takeaway

If you are blaming yourself for your inability to afford a home right now, you need to stop and realize that you are being subjected to national, sometimes international, macroeconomic machinations that are way beyond your control.

We are in a period where the housing market just plain sucks, and there’s not much anyone can do as an individual.

My first suggestion is to take a step back and reevaluate your priorities. It could be that buying a home just sounds nice but really isn’t all that important.

But if buying a home is really at the top of your priorities, start asking “how can I buy a home”. The answer will probably be harsh, as it takes a lot of money to buy, then maintain, a house. But if it’s truly your goal, then at least you have a number to work towards.

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This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.

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