Why is it getting harder and harder to keep a roof over your head?

Americans looking to buy or rent a home have had a tough year.

In some cities, rents are increasing by double-digit percentages. Meanwhile, buying a home is the most affordable it has been since the mid-1980s. With mortgage rates above 6% and home prices below record highs reached in recent months, many potential home buyers are out of the market.

And while the market is showing some signs of cooling, it doesn’t look like there’s much relief for homebuyers.

A year ago, a buyer with 20% down for an average price of $363,800 had a single-family home and financed the rest with a 2.88% mortgage (average at the time) with a monthly payment of $1,208.

Today, a homeowner buying a median-priced home currently priced at $396,300 with a mortgage currently averaging 6.29% would pay $1,960 a month in principal and interest. That makes $752 more every month.

As inflation drives up most household expenses, few potential homebuyers can afford these higher monthly payments.

Over the past five years, the median home price has risen 60%, while the median income has risen less than 15%, said Andy Walden, vice president of business research at mortgage database company Black Knight.

“Home prices are significantly out of line with income levels,” Walden said.

Americans are now spending more than 35% of their median income on monthly principal and interest payments on that newly purchased median home. Historically, Americans spent nearly 25% of the median income on payments.

To get back to that level, Walden said, a combination of these things would have to happen: a person’s income would have to increase by 40%, mortgage rates would have to be cut in half, or it would have to be 30%. a decline in the median house price.

But none of those things are likely to happen anytime soon.

One reason housing has become so expensive is that the record low mortgage rates seen during the Covid-19 pandemic increased demand for homes, which in turn pushed prices higher. With multiple buyers competing for the limited number of homes for sale, bidding wars and cash offers became commonplace, pushing prices to record highs.

Now buyers are grappling with a combination of high home prices and rising mortgage rates.

“The pain point came when interest rates returned to 6%,” Walden said.

The other side of the problem is supply. Eager buyers have been hit by a nationwide shortage of homes that have long been completed, creating a supply-demand mismatch that has pushed up home prices.

According to the National Association of Realtors, the U.S. has lost about 5.5 million homes over the past 20 years because builders failed to keep up with historical construction trends. If we include, among other things, the destruction of property due to demolition or natural disasters, the total deficit during this time can be close to 6.8 million.

The shortfall in units is so great that it would take more than a decade to catch up, according to NAR.

But even if more houses and apartments are built, it doesn’t matter if people can’t afford them.

As of April 2021, a household would need to earn about $80,000 a year to pay for a median-priced home with a modest 3.5% down payment. A year later, the income requirement was $108,000. That cost increase means that about 4 million renter households who could have bought a median-priced home last year were unable to do so twelve months later, according to Harvard University’s Joint Center for Housing Studies.

Without a home to buy, renters will stay put, further driving up rents in an already tight market.

Sunbelt cities such as Phoenix and Austin saw the largest increases in housing costs during the pandemic. According to Realtor.com, the price of a home in Miami is up 33% from a year ago and rents are up 17% from last year. But the affordability crisis is happening nationally, in all regions of the country.

When renters reach the limit of what they can pay each month, home ownership becomes even more out of reach as they struggle to save for a down payment. This widens the wealth gap and locks in inequality between those who benefit financially from home ownership and those who do not. According to NAR, it also widens the racial homeownership gap, where 72% of white Americans are homeowners, while only 43% of black Americans own a home.

The housing market is showing clear signs of cooling. Home sales have fallen for seven straight months as the cost of buying and financing a home pushes more people out of the housing market. Typically, as demand declines, prices fall and eventually mortgage rates fall.

For now, however, mortgage rates are likely to rise further as the Federal Reserve continues to raise interest rates to fight inflation.

The Fed does not set the mortgage interest rate for borrowers. Instead, mortgage rates track the yield on the 10-year US Treasury. As investors expect the Fed to raise interest rates, they often sell government bonds, which raises yields and, with it, mortgage rates.

Most housing policy experts say the solution to the affordability crisis is to build new, moderately priced homes. But because these homes are not as profitable for builders as larger, higher-priced homes, this requires a concerted effort from both the public and private sectors.

In May, the Biden administration announced a housing supply action plan to close the affordability gap and ease housing costs. The plan aims to increase the supply of affordable housing by increasing existing federal funding and incentivizing areas to reform zoning and land use policies to build more affordable housing. It also encourages home builders to use more efficient construction methods.

But none of these are quick fixes, and some require congressional action.

Separately, the Federal Housing Finance Administration, which oversees mortgage giants Fannie Mae and Freddie Mac, said this summer it plans to expand home financing options, especially for buyers of color, in an effort to close the racial home ownership gap. These programs include down payment assistance, lower mortgage insurance premiums and a credit reporting system that takes into account rental payment history.

Some of those ideas, including new zero-down-payment loans with no closing costs for buyers in certain black or Hispanic neighborhoods, are already in place.