Homeownership Out of Reach for Average Earners in 2020

If you have spent any time on BiggerPockets recently, you are sure to have come across many befuddled members and writers here (including this humble author) trying to figure out why real estate prices are continuing to rise during a deep recession with extremely high unemployment. The answer appears to be some unprecedented quantitative easing by the Federal Reserve, slowed down housing construction, and continued population growth.

Regardless of the causes, this increase in home prices during a recession has had some significant effects. Most notably, housing has become less and less affordable across the country. According to ATTOM Data Solutions, housing prices in the third quarter of 2020 are substantially less affordable than just a year ago:

“…median home prices of single-family homes and condos in the third quarter of 2020 are less affordable than historical averages in 63 percent of counties with enough data to analyze, up from 54 percent a year ago.”

ATTOM Data Solutions determined affordability for the “average wage earners by calculating the amount of income needed to make monthly house payments—including mortgage, property taxes, and insurance—on a median-priced home, assuming a 20 percent down payment and a 28 percent maximum ‘front-end’ debt-to-income ratio.” Most banks aim to lend to those whose housing expenses (mortgage, taxes, insurance) total no more than 28 percent of their total income.

Wage growth had started to increase faster than inflation in recent years, but all that came to a grinding halt with the coronavirus pandemic and subsequent lockdowns. Add that to the major spike in unemployment and the very odd continued increase in housing prices and affordability has gotten worse and worse.

As ATTOM Data Solutions notes,

“Compared to historical levels, 308 of the 487 counties analyzed in the third quarter are now less affordable, up from 262 of the same group of counties in the third quarter of 2019. The fallback has come as spikes in single-family home prices—occurring despite economic troubles related to the ongoing coronavirus pandemic—have outpaced the impact of increasing wages and declines in mortgage rates to historic lows.

“Amid those trends, costs associated with median-priced homes are unaffordable for average wage earners in 61 percent of the counties in the report during the third quarter of 2020.”

Local Affordability

As with any national trend, the changes are more pronounced in some areas than others. Indeed, in a few places, homes have actually gotten more affordable in the last year.

Not surprisingly, the counties that have become the least affordable are centered predominantly in Southern California.

“The largest of the 299 counties in the report where the median home price is not affordable for average wage earners in the third quarter of 2020, based on the 28-percent benchmark, include Los Angeles County, CA; Maricopa County (Phoenix), AZ; San Diego County, CA; Orange County, (outside Los Angeles), CA, and Miami-Dade County, FL.”

On the other hand, the counties that are the most affordable are more likely located in the Midwest and Southeast.

“The 188 counties with affordable median-priced homes in the third quarter of 2020 for average local wage earners (39 percent of the 487 counties analyzed) include Cook County (Chicago), IL; Harris County (Houston), TX; Philadelphia County, PA; Hillsborough County (Tampa), FL and Cuyahoga County, (Cleveland), OH.”

The report also points out that home prices are up by at least 10 percent in 52 percent of the counties analyzed (252 total). Furthermore, price appreciation has outpaced wage growth “in almost 90 percent of markets.” Most of the largest increases once again in Southern California.

Some of these counties require truly stunning annual wages to qualify for a loan to buy the “median-priced home.” For example, San Francisco County requires a salary of $292,474, Santa Clara in California requires $251,534, and New York County (Manhattan) takes $308,015!

Overall, the “average wages needed to afford a median-priced home exceeds $75,000 in a quarter of markets.”

What Should Real Estate Investors Make of This?

ATTOM concludes, “Among the 487 counties in the report, 179 (37 percent) are more affordable than their historic affordability averages in the third quarter of 2020, down from 46 percent in both the second quarter of 2020 and the third quarter of last year.” In other words, real estate is less affordable than last year and its historic average in most places in the country.

Such a trend cannot continue forever as the number of able buyers will dry up unless housing becomes more affordable. We do not know when that will be nor how severe a correction will come from it. Indeed, we cannot be completely certain any correction will ever come. But we are assuredly in a volatile and uncertain market, wherein it would be wise for investors to proceed with caution.

What’s your take on the current state of the market? Are you continuing to invest or holding off for now?

Share your thoughts with a comment below.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.