The American dream of homeownership is slipping away for the middle class, as soaring home prices and interest rates create an unprecedented challenge. A recent article by Fortune delves into the harsh realities faced by average Americans in the current housing market, as top economist Ali Wolf sheds light on the stark choices of either being ‘wealthy or lucky.’
The Soaring Challenges of Today’s Housing Market
The housing market has become wildly unaffordable, especially for the middle class. Mortgage rates, reaching a two-decade high in late 2023, coupled with soaring home prices, have elevated the American homebuying dream to a luxury accessible only to the upper echelons of society.
Ali Wolf, the chief economist of Zonda, highlights the stark reality: “In the past, if you were middle class, it was almost assumed you would become a homeowner. Today, the aspiration is still there, but it is a lot more difficult. You have to be wealthy or lucky.”
The Disparities in Middle-Class Income Growth
While household incomes have indeed increased over the past five decades, the rise has not been proportional across income brackets. Pew Research Center considers middle-class household income to be around $90,000.
In 1970, the average income for middle-class Americans was approximately $60,000. However, Realtor.com’s analysis, using the U.S. Census Bureau’s median household income of $74,580, paints a bleaker picture.
Even with this income, a middle-class American finds it challenging to afford a median-priced home of $410,000, as per Realtor.com’s recent data.
The National Federation for Credit Counseling recommends that buyers shouldn’t spend more than 30% of their income on housing. This would mean a middle-class household could only afford a $270,000 home with a 10% down payment and minimal debt.
Tate Kelly, a broker with Coldwell Banker Warburg, adds perspective: “To many Americans, finding a home that is considered ‘affordable’ is nearly impossible.”
The Evolution of Middle-Class Housing Affordability
The history of middle-class housing affordability traces back to the post-World War II era. The G.I. Bill, a surge in benefits for veterans, the baby boom, and a general post-war optimism laid the foundation for widespread middle-class homeownership.
The homes built during this era became the gold standard for affordable starter homes, complete with three bedrooms, a yard, and proximity to essential amenities.
Christopher M. Naghibi, executive vice president at First Foundation Bank, reflects on this historical trend: “Over the course of history, being middle class almost guaranteed eventual homeownership.”
However, the idyllic narrative took a turn in the 1970s, marked by the onset of the Great Inflation. The turbulent economic climate, characterized by soaring interest rates and a severe recession in the early 1980s, disrupted the middle-class trajectory towards homeownership.
Many economists draw parallels between the current housing affordability crisis and that of the 1980s, marked by peak mortgage rates of about 18%. Others argue that today’s market is the least affordable in history. According to Naghibi, “We are at the worst housing affordability since the early 1980s according to the data.”
He further emphasizes that the current crisis not only locks out new homebuyers but also deprives them of crucial equity-building years.
The Hope for 2024: Projections and Pessimism
While some housing market forecasters initially predicted a drop in mortgage rates and home prices for 2024, adjustments are already being made to these projections. Zillow now predicts a 3.7% increase in home prices, and Moody’s Analytics chief economist Mark Zandi, who expected home prices to drop in 2023, saw an increase of 5%.
Mortgage rates, which slightly decreased from their October 2023 peak, have been on the rise again, approaching 7%. This, combined with higher home prices, has left many economists and housing market experts pessimistic about housing affordability improving this year.
Tate Kelly suggests that a drop in mortgage rates could potentially allow more buyers to increase their budgets, but challenges persist. New construction is lacking, and overall housing market inventory remains low, limiting options for potential buyers.
The Road Ahead
As the housing market grapples with the worst affordability crisis since the early 1980s, the road ahead remains challenging. The interplay of mortgage rates, home prices, and limited inventory poses formidable obstacles for those aspiring to achieve the American dream of homeownership.
While hopes linger for a turnaround in 2024, the fundamental issues underlying the crisis demand comprehensive solutions. The unaffordability of homes for the middle class reflects not only a financial hurdle but also a societal shift, requiring a holistic approach to address the evolving dynamics of the housing market.
What do you think? Is the American Dream now an exclusive privilege for the wealthy or the exceptionally fortunate?
As housing affordability slips away, can the middle class reclaim the promise of homeownership? Will policymakers take bold steps to bridge the growing gap between income and home prices?
In a housing market spiraling out of control, what sacrifices are American families making to secure a place to call home?
