One of the essential pieces of the American dream includes the opportunity to be a homeowner. This dream, for many Americans, has begun to look like a nightmare. Home and rental prices are skyrocketing, inflation is on the rise, and a pandemic we thought would soon be over is still trying to get the last word! As we live in a world filled with so much uncertainty, one thing we can always be certain of will be our need for adequate housing. And let’s be honest, it would be awesome if that housing was more affordable.

What Does Affordable Mean?

If something is affordable, it means its price is low enough that you (or most people) have enough money to buy it. If something is affordable, paying for it shouldn’t restrict you from paying for any of your essential needs such as food and clothing. With that in perspective, the amount someone can afford will depend on a few different factors and will look differently for everyone.

How Much Can You Afford?

The cost of housing should be no more than 30% of your gross monthly income, which is your total income before taxes or other deductions are taken out. Housing expenses include rent and utilities such as water, electricity, or gas heating. Additionally, for homeowners, this also includes expenses for insurance and property taxes, in addition to the mortgage. This percentage is intended to allow for other important expenses such as food, transportation, and childcare. A person with a gross monthly salary of $5,000, should have housing expenses that do not exceed $1,500. If the actual percentage is much higher than 30%, it may be time to consider a cheaper place or possibly refinancing to save some money. Even if you’re a homeowner, you don’t have to feel trapped. There are various mortgage solutions and resources available that may fit your needs.

Cost of Living and Income

Investopedia defines the cost of living as the amount of money needed to cover basic expenses such as housing, food, taxes, and healthcare in a certain place and time. The cost of living is tied to wages and is often used to compare how expensive it is to live in one city versus another. For example, wage levels in a larger, more expensive city must be higher so that people can afford to live in that city.

In a recent nation-wide survey conducted by the United States Census Bureau, nearly 8 million renters were interviewed to obtain their level of confidence in paying next month’s rent. The results indicate the lowest paid renters make up over half of the individuals who are not confident at all that they would be able to make next month’s rent payment.

Source: U.S. Census Bureau Household Pulse Survey, Week 41.

The confidence levels reflected in the report also vary by race. While 9% of White renters indicated they had no confidence in the ability to pay, 20% of Black renters, 16% of Hispanic renters, and 10% of Asian renters lacked any confidence as well.

The National Low Income Housing Coalition recently released its Gap Report, which shows that not a single state has an adequate supply of affordable rental housing for the lowest income renters. There are approximately 37 affordable and available rental homes for every 100 extremely low-income renter households. Among the largest metropolitan areas, the supply ranges from 16-50 affordable and available rental homes for every 100 extremely low-income renter households. There are zero counties nationwide where a renter working 40 hours a week and earning minimum wage could afford a typical two-bedroom apartment, without exceeding 30% or more of their income. While homeownership rates are higher among White households, it is not surprising that most extremely low-income renters include Black, American Indian, and Latino renters. This in turn, creates a major lack of diversity within communities.

While housing prices continue to increase, wages, contrarily are not increasing at the same rate to allow people to keep up with housing prices. Historically, it was expected that rent amounts grew as wages increased. Today, this does not seem to be the case. Based on a U.S. Bureau of Economic Analysis, over the last ten years, there has not been a significant change in wage and salaries growth. So how are people expected to afford current housing prices with salaries more closely aligned with rent prices from 10 years ago? As companies scramble to recover from the impact of COVID-19, we have begun to see slight increases in wages, but it is unclear how they will correlate to rising housing prices and future conditions.

In addition, we are seeing more and more Baby Boomers retire, enter active senior communities, and prepare to live on a fixed income. This presents a challenge as housing prices continue to soar; meanwhile, the amount of retirement or social security benefits will likely not keep up with the market increases.

Rising Market Prices

Real estate experts are already forecasting a rise in mortgage rates and median home prices, and anticipate low inventory as well. During the housing frenzy of 2021, home prices peaked nationwide, after experiencing increases upwards of 30% from the previous year. This pricing frenzy also drove rental property owners to increase their rental prices to keep up with the market and demand. Low interest rates and wealth inequality allowed many investors to purchase homes with cash, beating many potential first-time buyers to the closing table.

While there seemed to be a shortage in inventory, more focus was placed on new construction homes. However, with the ongoing supply-demand issue, costs of building homes have gone up dramatically as well. This means the same house priced at $400,000 in 2019 may now very well be selling for $600,000. This can be very frustrating for buyers or even renters who have been contemplating buying their first home and are intimidated by home-price appreciation. Despite these challenging factors, owning a home will inevitably continue to be the dream of many Americans.

Rising material costs means homes are even more expensive to build and thus only add to the scarcity of properties to rent. According to the National Low Income Housing Coalition, there is a shortage of approximately 6.8 million rental units – or 110,000 units needed per year. Based on supply and labor shortages, supply may never sufficiently address the demand.

“In the middle of every difficulty lies opportunity.”
— Albert Einstein

Moving in the Right Direction

It is evident that affordable housing challenges will not be eliminated overnight. It is a sad truth to face, but it is one that needs to be addressed with urgency. It is often during extreme difficulty that people find ways to unite for the good of a community or a cause. Many poverty-stricken cities with the greatest lack of resources, have some of the greatest residents who love, look out, and care for one another. It is time that our local, state, and government officials develop a plan to look out for these residents as well. In the meantime, we must work diligently towards being a part of the solution. At CCCSMD, free financial education and financial counseling is available to help you learn the fundamentals of budgeting and housing. Don’t give up on your dreams of finding the perfect home for you and your family. There are mortgage solutions and resources available to make all your affordable housing and home buying dreams come true!

Emily J. Burton, Writer/Contributor
Owner, Bold Butterfly, LLC