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The Social Impact of Unaffordable Housing


Written by: Columbia Threadneedle Investment Team

With wages failing to keep up with real estate prices, buying a home is increasingly out of reach for many Americans, especially millennials. This is leading to some profound social changes.

After the slump from 2007 to 2011, U.S. house prices have been rising quickly once more. That’s good news for homeowners who can watch their assets rise in value, but it leaves millions of other Americans wondering if they’ll ever be able to afford to buy their own home.

Median incomes are not keeping pace with the rising cost of homes, forcing more people to either rent, stay at home or borrow cash from family to help purchase a home. With more parents and grandparents providing financial support for adult children, it’s important for financial planners to determine whether clients helping millennial children are hurting their retirement savings.

Housing has made a remarkable recovery, but wages are a different story

From 1990 until late 2006, house prices soared as incomes rose and interest rates fell. But toward the end of 2006, the market began to show signs of weakness. Between Q3 2007 and Q1 2012, the House Price Index lost ground in 16 out of 19 quarters. The lowest point occurred in the first quarter of 2011 when the index reached 177.77, taking it to a level last seen in 2003. From peak to trough, the index fell 21%.

Since the second quarter of 2012, prices have picked up momentum, and at the start of 2016 the index finally overtook its previous high set almost a decade earlier. Since the low point of Q1 2012, the index has gained 31%. In contrast, median incomes across the country are up just 13% since the end of 2011. The region where incomes have suffered the most is the South, where incomes have risen only 9%.

Many millennials are being squeezed out of the housing market

All this has clear consequences for housing affordability. The National Association of Realtors (NAR) tracks the difference between household incomes and the average price of single-family homes in its Housing Affordability Index. Between the start of 2013 and July 2016, the index fell from 214.5 to 157.1. A score of 100 means a family earning the median income will earn exactly enough to qualify for a mortgage on a median-priced house. A score above 100 means there’s money to spare, while a score below it means prices are out of reach.

Younger buyers are worse off than the average. The NAR’s First-Time Buyer Affordability Index was at 104.6 in Q2 2016, only just above the all-important 100-point threshold. In 2013, it stood at 116.7, highlighting the squeeze millennials have been coming under in the housing market.

Housing affordability differs by region

In regional terms, the gap between house prices and household income is tightest in the West, where the average house costs $349,200 and the affordability index stands at just 117.5. That compares to an average price of $195,300 and an affordability index score of 194.8 for the Midwest, where the environment is the most favorable for homebuyers.

On a city-by-city basis, the least affordable locations included California’s San Jose-Sunnyvale-Santa Clara area (the heart of Silicon Valley), where the affordability index was running at just 64 in 2015, and Honolulu, where it was 66. At the other end of the scale was Decatur, Illinois, where the index was at 388.

Bottom line

The lack of affordable housing has a social as well as an economic cost. With first-time buyers often priced out of the real estate market, there is a return to multigenerational living, as children stay at home longer. Nearly one in five Americans now lives in a household with two or more generations of adults. And according to the Pew Research Center, 32% of 18-34-year-olds were living with their parents in 2014.

This isn’t only because of housing costs. Other social trends are at play, from falling employment levels among young men to people marrying later in life and a rise in the number of Hispanic and Asian households that are traditionally more inclined toward multigenerational arrangements. But the affordability of real estate is arguably an underlying factor in some of these trends, too.

Another consequence of all this — at least for families who aren’t so keen on the idea of multigenerational living — is that some grandparents and parents are coming under pressure to help their children with deposits to buy their own homes. Understanding these trends and how they may impact a family’s financial planning can lead to more productive and compassionate client conversations.

See Societal Trends: Housing Cost Uncertainty above! For more information, visit us here.

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