Homeownership the Expensive Frontier of the American Dream

Written by: Ben Mizes | Clever Real Estate

Since after World War II, owning your own home has been a staple of the American Dream.

A recent Clever study found that 84% of millennials believe that buying a home is still a core component of living the American Dream.But with housing prices skyrocketing at a rate higher and faster than household wages, that dream is becoming increasingly difficult to fulfill. Another recently published Clever study took an in depth look at how the disparity in housing prices compared to annual income increases have created a housing problem for today’s buyers. The Clever study found that median home prices nationwide have increased at four times the rate of household incomes since 1960. At the same time, nationwide rents have increased at twice the rate of household incomes, making it difficult for buyers to save the money they need for a down payment.The nationwide price-to-income ratio — the figure used to determine how many years of median income needed to save money for a down payment—hasn’t been healthy since the late 1990s. Industry experts consider 2.6 to be a healthy price-to-income ratio, a rate not found in most of the country. In 2019, only 16 out of the 100 most populated cities in the United States are below a 2.6 price-to-income ratio.

This trend is most apparent in the West.

Median home prices in the West have increased by 195% since the 1960s, while median household income only increased by 26%.In 1960, the price-to-income ratio for Western states was 2.1. By 2017 the ratio in the West increased to 4.9. That means the growth rate of home prices is 7.5 times more than the growth rate of household income, making the Western U.S. the least affordable region in the U.S.Major cities in the West are particularly affected by this trend. Since the 1980s, the price-to-income ratio for San Francisco and Los Angeles climbed to 4.7 and 5.6 respectively, reaching its peak before the 2008 financial crisis at 9.2 and 8.8. In 2017, the price-to-income ratio was 5.4 for Seattle and 5.1 for Denver.The Northeast isn’t far behind. In the 1960s, houses in the Northeast had a price-to-income of 2.1. The price-to-income ratio of 3.7 by 1990, reaching its peak during the 2008 financial crisis with 4.6 and dropped to 4.0 in 2017.In 2019, the growth rate of home prices is 4.2 times more than the growth rate of household income, making the Northeast the second least affordable region.

There is some hope in the Northeast.

Between 2000 and 2017. Home prices increased by 110% before the financial crisis, but decreased 24% between 2008 and 2010. Home prices dropped by a further 18% between 2010 and 2017, while household income increased by 9% between these years.In the Southern United States, homes are still moderately affordable, but that is changing. From the 1960s through 2000, home prices were consistent with household income increases. During this time, the price-to-income ratio was 2.6, making the dream of home ownership attainable.That stability in the South has been in trouble since the 2000s. Between 2000 and 2017, home values increased 75% and continue to climb, while income continues to grow at about 2%.

At present, the Midwest is one of the few consistently affordable areas.

Clever’s study found there is almost no gap between rental and household income growth rates. This means Midwesterners can save for their down payment and afford the median mortgage payments in their cities.As the gap price-to-income-ratio continues to grow nationwide, the topic of affordable housing has become an increasingly popular point of conversation in Washington. Candidates for the 2020 presidency have made affordable housing and mortgage rates one of the key issues for discussion during debates.In a recent column for the New York Times, Lizabeth Cohen, the author of “Saving America’s Cities: Ed Logue and the Struggle to Renew Urban America in the Suburban Age,” argues that like during the New Deal of the 1930s, it might be time for the federal government to enact policy to create affordable housing.While leaders identify ways to make the American Dream more possible, home buyers can do their part to try to save when purchasing a house by searching for home buyer rebates that can gift them money at closing and top local agents who can help them search for the best deals on new property.

Homeownership is difficult to attain in 2019 and it may get harder, but there are ways to make the process easier and save money. 

Related: The Future of Real Estate Investing