What Factors Affect Housing Affordability


Housing Affordability Problem is Worsening

The US is currently facing an affordable housing crisis, according to experts. Youmay expect that thriving employment and low mortgage rates in the country shouldfoster a strong housing market. However, that is not true; they are actuallydeepening America’s housing affordability crisis.

t is worth mentioning that median home prices in the US in the first quarter of 2019 weren’t affordable for average wage earners in more than 70 percent of thecountry’s largest counties, according to a housing report.

And research supports it. Almost 33 percent of renters in the country say they cannot afford to purchase a home. And that is not all; saving for a down payment is not expected to get easier in the near future. This is because home prices in the US are climbing at almost twice the rate of average wage growth.

In the US, public concern regarding the affordability of housing mainly arises from 2 factors. First, it is no secret that housing is the single biggest expenditure item in the financial budgets of most families as well as individuals. Experts usually state that the maximum amount a family should ideally pay for housing should be 30 percent of their income.

Keep in mind that the average household spends about 25 percent of income on housing expenditures. On the other hand, poor and near-poor households generally devote 50 percent of their income to housing.

It is no secret that these high proportions indicate that even minor percentage fluctuations in housing prices and rents in the country are likely to have a huge impact on non-housing consumption as well as household well-being. Also, nationwide, the average income required to purchase a typical home is more than $60,000. This amount is well above the average income of the majority of households in the US.

Second, several large metropolitan areas in the country have witnessed well-publicized increases in both housing prices and rents recently.

Housing Affordability – What Does It Mean?

According to the federal Department of Housing and Urban Development (HUD), an “affordable dwelling” is one that a household or family can obtain for 30% or less of its income. However, keep in mind that this varies from one city or state to another.

It is worth mentioning that keeping housing costs in the US below 30 percent of average income helps ensure that families have sufficient funds to pay for various other nondiscretionary costs. This is why policymakers deem households that spend over 30% of their income on housing costs as housing cost-burdened.

What makes a house affordable often comes down to simple math at the most basic level. You have to subtract your mortgage or monthly rent from your take-home salary, and you should have sufficient money left over for various basic necessities, such as groceries. Here is an example: a household or family is considered “low-income” in the US if it makes lower than 80% of the median income in its local area. Note that this is known as Area Median Income or AMI. Hence, according to this definition, a house is deemed “affordable” for a low-income family if it costs them less than 24% of the AMI (area median income).

Factors Affect Housing Affordability

Affordability is a vital aspect of the US housing market and impacts the journey of an average home buyer. There are many factors that affect housing affordability in the US. For example, housing affordability in the country depends to a considerable degree on the prevailing mortgage rates. After the housing crisis in the US, the drop in mortgage rates led to housing affordability increasing to a higher level.

Let’s take a closer look at some of these factors.

Housing Supply

This one is a no brainer. Like any other commodity, an obvious factor that affects housing affordability in the country is the number of houses that are available for sale in a specific market—the ‘supply’.

Note that when considering their important role in promoting the US housing supply, all levels of government have to acknowledge and understand that housing affordability in any market is often a function of housing supply. It is also important to acknowledge that by placing more pressure, through poor policy settings, on the new home supply for both private rental and sale, governments usually effectively exert pressure back down the local housing supply chain. And this increases the number of people who seek government assistance for housing.

It is vital to understand that supply and demand is not a simple thing to measure or calculate in the real estate market. There are several reasons for this. It is partly due to the fact that it often takes a long time, usually a few months, to construct new houses and fix up old homes to put back on the market. Also, real estate is different from many other industries as it takes plenty of time to sell and buy homes and other properties.

In US suburbs that have fewer houses or less land available on the market, most vendors tend to enjoy the luxury of charging a premium price, while at auctions, bidders are more likely to exceed their budget limits.

Interest Rates and Lending

Interest rates and lending play a big role in the determination of the cost of your mortgage interest repayments. Note that shifts in mortgage rates and income either decrease or increase consumer home-buying power or affordability. When mortgage rates in the country fall, consumer home-buying power tends to increases.

As the most recent data from Freddie Mac indicates, mortgage rates in the US are now at 3.69%. This is more than one percentage point lower where the mortgage rates were at this time last year, and the market rate in the country was almost 5%.It is worth noting that rates remained at the same level during the second week of November 2018. However, that was the highest they climbed, as mortgage rates then started declining, and that trend continued throughout much of this year.

Note that the full-percentage-point-decline in interest rates has been quite good for homebuyers in the US. This is because the Wells Fargo Housing Opportunity Index/ the National Association of Home Builders shows that home affordability increased in the third quarter.

On the other hand, when interest rates increase, then demand for housing collapses, which causes a considerable fall in demand for housing.

The way that lending operates is often one of the more complicated factors that influence the cost of housing or housing affordability. Lending can considerably have an impact on housing affordability in a few of these ways.

First, lower interest rates in the country often encourage banks and other financial institutions to lend more money. This can increase the cost of housing in the US, as most buyers are able to pay more. On the other hand, higher interest rates often result in considerably lower house prices.

Second, limits on the sum of money banks and financial institutions can lend investors can also make housing more affordable in the country, freeing up many housing options for people with lower budgets.

Population Growth

This is another very important factor that affects housing affordability. Housing affordability in a specific area is affected by the number of individuals who would like to live in that area. The more populated an area or city is, the more expensive houses will be, which typically reserves homeownership to people with high incomes.

Note that it is not only the number of individuals but various demographic changes, such as the increasing number of single people living alone, which have led to rising demand for houses in the US.

Also, if a suburb is more desirable to people because of factors, like transport connections or proximity to employment hubs, it may be considerably less affordable overall. This is why often, the cities and towns that tend to attract the most newcomers are also the same places where many folks have to compete for living space.

Buyer Confidence

This is one of the overlooked factors. Demand for homes in any city depends heavily on consumer confidence. It depends, in particular, on people’s confidence about the overall future of the economy as well as the real estate market. Keep in mind that if consumers expect home prices to rise in an area, demand will increase so people may gain from rising wealth. For example, in an economic boom, demand for homes often increases faster than incomes.

Materials and Labor

There is no denying that the cost of the materials and labor can affect the cost of housing. In most cases, these costs are generally directly linked with the US economy and value of US dollar, etc.

It is Important to Ensure Housing Affordability

Besides meeting the basic human need for shelter, housing is also an important component in efforts to promote or encourage positive life outcomes, especially for low- and moderate-income households. According to research, affordable housing can help improve residents’ access to education, health, and employment prospects.

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