Real Estate News & Commentary

Homeownership Out of Reach for Average Earners in 2020

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Real Estate Market Blue Price Tags Above Properties. House Prices.

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.

Related: Some Say the Housing Market Is Poised to Fall Off a Cliff—Here’s How Investors Should Proceed

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.”

Related: What the Decline of Upward Mobility Means for Homeownership (& Real Estate Professionals)

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.”

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Two wooden houses and a green up arrow on the sign. Real estate value increase. Rising prices for housing, building maintenance. High rates of construction, high liquidity. Supply and demand

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.

Andrew Syrios has been investing in real estate for over a decade and is a partner with Stewardship Investments, LLC along with his brother Phillip ...
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    Kyle Spearin Investor from Boston, MA
    Replied 15 days ago
    Great article! Sad, but true in many cases--in the Boston market, someone making $50,000 wouldn't get pre-approved for anything besides a tear me down.
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied 14 days ago
    Thanks Kyle and yeah, particularly on the coasts it's simply becoming absurd
    Darius Ogloza Investor from Marin County California
    Replied 14 days ago
    We should not ignore the fact that the median family income across the U.S. is now about $71,200 and that in urban areas that number exceeds $80,000. Family income is a better indicator of where folks actually stand than household or per capita income for a host of reasons. The median family in an urban area can easily afford a home in the $300K range.
    Michael Sharp from Utah
    Replied 14 days ago
    Only in California. The rest of America is about half that.
    Darius Ogloza Investor from Marin County California
    Replied 13 days ago
    That's just not true. You are thinking per capita income. I am talking family income. Census bureau has the data.
    Tim Parker Investor from Bremerton, Washington
    Replied 13 days ago
    It's all the Fed. Inflation is only showing up currently in asset prices, not wages. Sad but true. No politicians are concerned with the middle class. They say they are, but they lie. Housing will continue to rise. Buy now and finance with low interest.
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied 13 days ago
    The Fed makes up a big part of for sure, but I don't think it's all the Fed. Construction is down, many cities have restrictive building codesimmigration is still relatively high despite what CNN might be saying, so population is still growing and of course, a huge number of people are out of work so wages are unlikely to grow and more people won't be able to afford to buy.
    Deanna Opgenort Rental Property Investor from San Diego, CA
    Replied 13 days ago
    I can tell you that in CA there are massive numbers of tech employees leaving the SF/Bay area like rats leaving a sinking ship. The tech companies are doing work from home & suddenly there is no reason to stay in the over-priced, locked-down Bay Area. Why pay $3k/mos to live in a dinky apt in San Francisco or San Jose? You can buy a house with a yard in (pick any small town/city within 300 miles (even move to another state). Banks are eager to lend, as long as you have a job. Anyone in the small towns who had even vaguely thought of selling their house has thrown it on the market for 125% of what it would have gone for 9 months ago, and unless they are a complete dump the houses are selling. As far as I can tell, in the small local market I know sales volume is up 300-400% of last year (or more), and prices are up about 20-30%...in just the past 6 months. As far as I can tell, wholesalers are calling every listed property owner in the area trying to buy their property (or more likely, to try to get it under contract, hoping people don't know the value of what they own).
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied 13 days ago
    It seems like it's more than just tech employees leaving California. It seems like just about everyone wants to get out of there
    Michele Meece Real Estate Agent from Durham, NC
    Replied 13 days ago
    Here in the Triangle (Durham, Raleigh Chapel Hill) the year to date median sales price is $290,000, so we are still below the $300's. There are houses in the $200 range but they are only lasting days on the market. That is the "bloodbath" price range.....selling for over asking price with huge due diligence deposits.
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied 12 days ago
    It ain't that high in KC (yet). There are still houses under $200K, but it was only a few years ago that there were plenty in blue collar, OK areas that were under $100,000. Bloodbath is right.