Our conversation, conducted by email, is below.
A housing shortage, an affordability crisis
WHAT MATTERS: I have read both that there’s a housing shortage and that there’s a housing crisis. Is there a difference between those ideas — a shortage and a crisis? And is the problem that there literally aren’t enough houses for the number of people in the US?
This is a gap so deep that it would take more than a decade to catch up. But even if more homes and apartments are built, it won’t matter unless people can afford them.
The cost of housing is driving inflation
WHAT MATTERS: The cost of housing has been cited as a cause of inflation. To what extent is that true and what is the market force that could lower the cost of housing?
BAHNEY: The soaring cost of housing has been a key driver of inflation. For most people, housing is their biggest expense. About one-third of the Consumer Price Index, a basket of goods and services the Bureau of Labor Statistics uses to track inflation, is the “shelter” component.
Where is the housing shortage felt the worst?
WHAT MATTERS: Which parts of the country are most affected by this problem?
The median-priced house now costs $749 more per month
WHAT MATTERS: The Fed’s medicine for inflation is to raise interest rates, which has driven up mortgage rates. That might control sales prices, but won’t it make the cost of housing more expensive?
BAHNEY: The Federal Reserve has been aggressively raising interest rates in order to stem inflation, which may reduce demand but also makes the cost of buying a home even more expensive.
But the Fed doesn’t set the rate borrowers pay on mortgages directly. Instead, mortgage rates tend to track the yield on the 10-year US Treasury. As investors anticipate the Fed’s rate hikes, they often sell government bonds, which sends yields higher and, with it, mortgage rates.
A year ago, a buyer who put 20% down on a median priced $359,900 home and financed the rest with a mortgage rate of 2.86% — which was the average at the time — had a monthly payment of $1,192.
Today, a homeowner buying the median priced home, which is now $403,800, with a mortgage at the current average of 6.02%, would pay $1,941 a month in principal and interest. That’s $749 more every month.
Americans are now spending more than 35% of their median income on monthly principal and interest payments on that median-priced home. Historically, Americans spent closer to 25% of their median income on payments.
To get back to that level, some combination of these things would need to happen, according to mortgage data company Black Knight: a person’s income would need to grow by 40%, mortgage rates would have to be cut in half, or there would need to be a 30% drop in the median price of a house.
None of those are likely to happen any time soon.
Homeownership is getting out of reach
WHAT MATTERS: If housing prices go down, it will mean millions of people lose value in their main asset. If housing prices don’t go down, it means millions of Americans will never own a home. It seems like an impossible situation.
Still, millions of people are being shut out of homebuying as the affordability challenges prove insurmountable.
How can this problem be fixed?
WHAT MATTERS: What are some of the ideas to fix this problem? Is there an effective way the government can act?
BAHNEY: Most housing policy experts say that building a steady supply of new, moderately priced homes is job number one. But because those homes are not as profitable for builders as larger, higher-priced homes, it will take a concerted effort by both public and private sectors.
But none of this is a quick fix, and some of it requires congressional action.