Homes across the country have appreciated at a near record pace over the last three years. Some of the hottest markets have seen prices return to, or even exceed, pre-recession levels. Of course, appreciation is great for homeowners, but it is also a double-edged sword. The increased housing costs that have become synonymous with today’s real estate landscape are taking a bigger bite out of the average homeowner’s income. In fact, U.S. housing costs recently posted their biggest gain in more than eight years.
According to MSN Money, “The consumer price index, or the cost of living, rose a scant 0.1% in July to mark the smallest increase in three months. Yet the cost of housing, the largest expense for most Americans, continued to rise, threatening bigger advances in consumer inflation in the near future unless prices ease up.”
Last month, the cost of housing rose a modest 0.4 percent. While the increase may not seem like much, it is the largest jump of its kind in the last eight years. Those of the Millennial generation are probably not even familiar with an increase of this magnitude. If that wasn’t enough, housing related expenses also saw an increase. Over the course of a year, housing related expenses jumped 3.1 percent, representing the largest increase since 2008.
Today’s real estate landscape has seen prices increase at an impressive rate. Over the last three years, in particular, a distinct lack of housing inventory has pushed prices up faster than was originally expected. To compensate for the lack of housing, builders have worked tirelessly to construct more homes. However, the amount needed to abate further price increases is a task in and of itself. Prices will continue to rise as long as housing inventory remains low.
At the same time, the price of most other consumer goods remains relatively unchanged. As recently as last month, food prices saw an increase of 0.2 percent, whereas energy prices rose a similar 0.1 percent. Neither had a significant impact on the income of the average American, at least not as much as housing costs.
San Diego is a prime example of how expensive housing has become. According to the California Association of Realtors (CAR), “25 percent of households could afford to purchase a single-family home in San Diego County at the median price of nearly $548,000. That’s down from 28 percent in the first quarter of this year and 26 percent in the second quarter last year.”
To put things into perspective, the average house in San Diego has become so expensive that paying off the monthly mortgage would require minimum annual income of $108,390. At that rate, only 30 percent of California residents could afford to own in San Diego. Just 10 percent of households could afford to purchase a median-priced house in San Francisco.
While housing affordability is an issue, renting is an equally pressing situation. Of particular concern, however, is the going rate to rent a home. It is not uncommon for the average renter to dedicate nearly a third of their income to rent in today’s market. In fact, rental asking prices have reached new highs. Affordability in the rental market has seen significant decreases over the past few years. According to Zillow, “A renter making the median income in the U.S. spent 30.2% of his/her income on a median-priced apartment in the second quarter, compared with 29.5% a year earlier. The long-term average, from 1985 to 1999, was 24.4%.”
While rental affordability is very localized, it has impacted markets of every size in nearly every state. According to Zillow, 28 of the 35 largest metros saw their rental affordability decline from the previous year. Los Angeles is currently the most expensive city to rent in, where residents have become accustomed to spending nearly 50 percent of their monthly income on rent. Not far behind are San Francisco (47%), Miami (45%) and New York (41%).