This is Sam Rashkin’s latest in a series of articles based on his second book, “Housing 2.0: A Disruption Survival Guide.” It is intended as a roadmap for high-performance builders to become the most successful in the industry.
It should not be a news flash to anyone that the nation is suffering an epic housing affordability crisis. However, a lack of urgent action at all levels of government and industry suggests the severity of this crisis is not being taken seriously enough.
Meanwhile, housing is rapidly approaching a breaking point that will inevitably disrupt our entire economy. Consider recent analysis results indicating median income households can afford to purchase homes in only two of the 50 largest metro areas in the U.S.
One of these two markets is Pittsburgh, Pennsylvania, where the median house price is $275,000. At the other end of the affordability spectrum is Los Angeles, where the median home price exceeds $1 million. Yet, both markets have very similar median household incomes of nearly $80,000. In other words, housing in Pittsburgh is about four times more affordable than in Los Angeles.
However, Americans are becoming increasingly house poor, even in the most affordable housing markets. This article will examine why this is the case and the implications it has for the sustainable housing movement and introduce Housing 2.0 fundamentals as a key path to attainable homes that live better.
Housing is the ultimate consumer product. Nothing comes close relative to cost, complexity, emotion and impact on our lives. Common sense suggests the customer must be able to afford to purchase a product in order for the business making that product to be viable. Yet, the industry has experienced an exponentially increasing cost curve over the past 40 years. (see Figure 1 below.)
Now we’re at a point where the ratio of median house price to median household income exceeds 5.0, a threshold considered “severely financially burdened.” A healthy housing market that is attainable to its customers would have a ratio of 3.0 and under.
The housing affordability crisis is even more severe than it appears, based on the price disconnect with household income. There are two reasons.
First, mortgage interest rates are currently hovering near 7 percent, further exacerbating the financial burden of high sticker prices.
Second, the price-to-income ratio alone does not account for a wide array of other homeownership costs, which have also increased far above the inflation rate. According to a recent survey, a typical American homeowner spends more than $18,000 on non-mortgage home expenses every year. These expenses include:
To better understand the full housing financial burden, all of these costs were researched and tabulated for owning and renting a median price single-family home in our two cities, Los Angeles (see Table 1 below) and Pittsburgh (see Table 2 below). The key data sources and assumptions are noted in the first column of the tables.
The results in these tables are disturbing. In Los Angeles, the total annual home ownership cost is nearly $130,000, which is nearly double the median household pre-tax income.
The cost in Pittsburgh, $27,500, is much better but still at the cusp of affordability, representing about one-third the median household pre-tax income. The results also show that renting is cheaper than owning in Los Angeles but higher than owning in Pittsburgh, and in both cases imposes too high a financial burden.
The total annual cost of renting a single-family home in Los Angeles, approximately $57,000, represents over 70 percent of the median household pre-tax income. The cost in Pittsburgh, $30,000, accounts for nearly 40 percent of household pre-tax income.
Renters can increase affordability by renting apartments rather than single-family homes, but these costs are also increasing significantly. A reasonable conclusion is that the high cost of housing, whether ownership or renting, is making Americans house poor. Key economic indicators bear this out, including:
High housing costs make renting more attractive than buying in expensive markets. This will be especially true as buyers observe significant decreases in home appreciation, and even depreciation already occurring in some markets, as housing prices push up against affordability limits. This is significant, because home appreciation is often a primary justification for the higher cost of homeownership.
Recent data suggests this shift may already be happening: Renting has surged by at least 5 percentage points in 11 out of 20 suburbs surrounding the largest U.S. metro areas.
The substantial increase in housing costs winds up shrinking the impact of increasing energy efficiency goals for sustainable housing. Saving $40 or $60 per month on utility bills doesn’t make a dent in monthly ownership cost, whether $12,000 in Los Angeles or $5,000 in Pittsburgh. Thus, the sustainability movement will need to pivot from emphasizing energy savings to more-compelling value propositions such as:
A deeper dive into opportunities to integrate and translate this value will be provided in future articles. However, the more critical impact is that sustainability is not enough in this new paradigm. Not nearly enough. It is critical that all housing professionals engaged in mainstream housing apply six strategies for minimizing the cost of housing:
Optimize:
It takes more than 400 pages in my book, "Housing 2.0: A Disruption Survival Guide," to cover the fundamentals required to apply these optimization strategies. They are all critical to ensure sustainable communities and homes also lead the industry in user experience and value.
In addition to using the book as a reference, please join me as we continue to address these fundamentals in future Housing 2.0 articles, seminars and workshops. The next webinar is November 6. Let’s join forces in urgently ensuring financial wellness and sustainability for mainstream homebuyers.
This Housing 2.0 presentation is sponsored by: Panasonic