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Housing Remains Too Expensive For Many Buyers

Published on Tuesday - July 15, 2014

The housing sector, for all intents and purposes, is headed in the right direction. After suffering through one of the largest recessions in U.S. history, the rebound appears to have gained traction. Mortgage rates, while on the rise, are not far off of historical lows. The rapid gain in home values appears to be easing. Sales are even rising slightly on a month-to-month basis (but are still below last year). Perhaps even more importantly, employment rates are improving at a healthy rate. However, despite all of these positive indicators, too many people can’t afford to buy a home.

“Despite this national slowdown in price gains, price increases continue to be widespread, with 97 of 100 metros [metropolitan housing markets] posting year-over-year price gains—the most since the recovery began,” according to Jed Kolko, chief economist at Trulia, a real estate sales and data company. “Furthermore, asking prices in June rose at their highest month-over-month rate (1.2 percent) in 16 months.”

The influx of progressively increasing home values took an aggressive hold of the market early in 2013, as investors took advantage of the ever-increasing number of distressed properties. While the biggest jumps were in markets like Phoenix, Las Vegas and much of California, other local markets followed, driven not by investors, but by short supply of homes for sale. Subsequently, inventory levels, or the lack there of, initiated a chain of bidding wars that swept across the nation.

“In May, 40 percent of sellers surveyed by Redfin said that they planned to list their homes above market value even though home sales had dropped by 9 percent since the year before,” the real estate brokerage’s chief economist, Nela Richardson, said. “Typically it takes sellers six to nine months to adjust to a price change, but this latest shift is longer. Prices have moved down and then up so much over the past five years that it’s even more difficult for sellers to have a realistic baseline for what their homes are worth in the current market.”

The following list represents the 10 metro areas in which asking prices rose the most in the year leading up to June:

  • Riverside-San Bernardino, CA
  • Atlanta, GA
  • Grand Rapids, MI
  • Miami, FL
  • Detroit, MI
  • Bakersfield, CA
  • Chicago, IL
  • Lake County-Kenosha County, IL-WI
  • Birmingham, AL
  • Cape Coral-Fort Myers, FL

The rise in prices has simultaneously removed a large portion of inexperienced investors from the market, leaving the gates open for regular, owner-occupant, and mortgage-dependent buyers. However, as mentioned before, homes are simply too expensive for the average buyer. Millennials, in particular, are finding it increasingly difficult to actively participate in the housing market.

Approximately 85 million people make up the millennial generation – those born in the early 80s through 2000. It is these individuals that are said to have received the brunt of the downturn. This group suffered the most during the 18-month recession starting in December 2007, said Harry Holzer, professor of public policy at Georgetown University in Washington. They were often the most recently hired, which made them more likely to be fired when companies cut back spending. Essentially, their inexperience made them expendable. Problems were only compounded in the face of mounting student debt, increasing home prices and strict lending guidelines.

In the past year, mortgage applications to purchase existing homes have dropped approximately 10 percent. Moreover, a recent report released by the Mortgage Bankers Association acknowledges that new construction loans fell 5 percent in June from the month before. Prospective buyers are even walking away from bidding wars due to a lack of affordability and credit.

Members of the Federal Reserve’s Board of Governors noted the disconnect in their most recent meeting, as noted in the minutes released Wednesday: “Despite attractive mortgage rates, housing demand was seen as being damped by such factors as restrictive credit conditions, particularly for households with low credit scores; high down payments; or low demand among younger home buyers, due in part to the burden of student loan debt. … Several other participants suggested the possibility that more persistent structural changes in housing demand associated with an aging population and evolving lifestyle preferences were boosting demand for multifamily units at the expense of single-family homes.”

Not surprisingly, concerns regarding affordability are not relegated to purchases alone. Rental rates continue to increase on a national level, making it harder for individuals to save up enough money for a down payment. Even though a monthly mortgage payment on the average house in the typical U.S. market is likely lower than a rent payment, renters today cannot come up with the down payment to buy and/or they don’t have the credit to qualify.

“Rent increases outpaced wage increases in all of the 25 largest rental markets. Rents rose more than 10 percent year-over-year in Miami, Oakland, San Francisco, San Diego, and Denver,” noted Trulia’s Kolko. “Among these five markets with the largest rent increases, all but Denver are among the nation’s least affordable rental markets.”

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