Sorry prospective home hunters, home affordability is expected to get worse.
Back in February, an article by Realtor.com outlined how earlier this year people making the national median income of $68,000 were still able to afford a home. However, they cautioned that this would most likely change as we continued through 2018. So far, it would appear that their prediction was accurate. But what is causing this rise in home prices? Let’s take a look at what exactly is driving up the cost of buying a home.
An Increasingly Lack of Supply Versus Demand
It is basic economics, a high demand with a low supply has resulted in the prices of homes to go up. Right now, we are facing a housing shortage that is creating bidding wars, making the cost of homes rise to the point where many can’t afford to buy. Naturally, this isn’t necessarily the case everywhere, with a few isolated areas having more properties available than others. Some areas that fit into this category include Scranton, PA, and Cumberland, MD.
However, the state that has the most unaffordable areas in the nation was California, with San Francisco taking the number one spot. The median home price in San Francisco is over one million dollars. To afford a house in San Francisco, one has to be raking in at least six-figures. Even though San Francisco is an extreme example, the overall problem is the supply shortage, which will continue to push home prices higher, outpacing wage growth and inflation.
Wage Growth and Inflation
According to the CNBC article entitled “US house prices are going to rise at twice the speed of inflation and pay: Reuters poll,” the average increase of wages remained below 3% even though housing prices rose by an average of 5% over the course of the last few years. This trend appears to be on track to continue, with “about 80 percent of nearly 40 analysts who answered an extra question said the already tight supply of affordable homes in the United States will either stay the same or fall from here over the next 12 months.” Moreover, the current forecast for rising home prices is estimated at 4.6% for next year, and 3.6% in 2020.
The Cost of Renting
The housing shortage has also played a role in the rise of rent. Rent rose at a rate of 2.8%, the fastest appreciating rate since 2016 according to Zillow. In the article “Housing shortage: Rents are rising at the fastest pace in almost 2 years,” part of the reason why rents have increased is the lack of affordable homes available for people to buy. As a result, people are staying in their rentals longer rather than buying. It has become a catch-22, how can one expect to save enough money if the rents they have to pay each month continue to rise along with home prices? Until supply can catch up to the current high demand for homes, buying will continue to be out of reach for most Americans.