What's Happened to the American Dream of Homeownership?
At Unreal Estate, we understand that owning property is a fundamental part of the "American Dream" for many Americans. However, the rising costs of homes and stagnant wages has turned that dream into a nightmare for many. We gathered Census data from 1960 to 2017 concerning home prices, rents, and household income to further understand the extent to which the American Dream has become unaffordable. After inflation adjustments, the future of the American Dream looks bleak: median home prices have increased 121% nationwide since 1960, but median household income has only increased by 29%.
Renters are also feeling the pinch. Median gross rent has increased 72% since the 1960s, more than twice the growth in adjusted incomes. This makes saving for a future home increasingly difficult. In this article, we'll examine the areas of the country where that are still affordable, and which housing markets are at risk of regression due to imbalanced home prices relative to household incomes.
A historical view of home price-to-income ratios can provide valuable context for understanding how expensive it has become to buy a home. Price-to-income ratios assess how long it will take to save for a down payment and the affordability of monthly mortgage payments. The rule of thumb recognized by most real estate agents is that a healthy price-to-income ratio is 2.6. This translates to needing 2.6 years of household income to afford the median price of a home.
Most major metropolitan areas have imbalanced price-to-income ratios, as median home prices increased at four times the rate of household incomes since 1960.
Nationwide rents have increased at twice the rate of household incomes since 1960, making saving for a down payment even more challenging.
Only 16 out of the 100 most populated cities in the United States are below a 2.6 price-to-income ratio in 2019. Realistically, the nationwide price-to-income ratio hasn't been healthy since the late 1990s.
By 2017, the nationwide price-to-income ratio was 3.6. Homes are steadily becoming less affordable, leading to unstable housing markets where demand can't meet supply.
Home prices in the West are particularly out of line due to high demand and limited supply. The average price-to-income ratio has been pushed to 4.4. The Midwest and South fare slightly better, with ratios of 3.3 and 3.2 respectively. Only the Northeast has a price-to-income ratio below 3, at 2.8.
Increasing the supply of homes in high-demand areas would help bring prices down, but this potential solution is complicated as it would require significant investment and planning. To achieve the American Dream of homeownership, potential buyers must carefully evaluate their finances and consider alternative options such as renting or looking for homes in more affordable areas. However, reaching this goal depends on various factors including economic conditions, wages, and housing supply, and Americans must be aware of the challenges they may face in pursuing it.
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