Some real estate experts predict that the obstacles to finding affordable housing as wages lag behind prices will likely ease as the nation moves further beyond the pandemic.
Adam Perdue, a research economist at the Texas Real Estate Research Center at Texas A&M University, said the gap between wages and housing prices grew during the pandemic, increasing unaffordability. But he predicts that by 2024, housing prices will again decrease as the market adjusts to what can be afforded.
“What we expected is a small drop (in prices) this year and just relatively flat for the next few years until everybody's wages catch back up and adjust over time to a level that can sustain these prices,” Perdue said. “Then we'll see the normal price increase path after that.”
At the onset of the coronavirus pandemic in early 2020, the Federal Reserve slashed interest rates to support spending by lowering the cost of borrowing for households. The decision flooded the market with buyers who were suddenly embracing a work-from-home lifestyle and taking advantage of the low rates.
This caused pressure on prices, as limited supply could not keep up with demand, Perdue said.
“Housing prices have been going up faster than the price of everything else, in general,” Perdue said. “And then they have also been going up faster than wages.”
Over the past month, reporters from CNHI News nationwide have sought to examine the issues surrounding affordable housing, who is most impacted by a lack of it and what solutions states and communities have implemented in this multipart special report.
The average house cost has increased dramatically over the past two decades. In 2003, the average sales price for a house in the U.S. was $233,100. In 2023, it was $516,500, an increase of 121.58%.
Wages not keeping pace
According to the U.S. Bureau of Labor Statistics, wages have increased nominally, on average, but have not kept up with inflation. For example, in March 2022, real wages for private industry workers were 3.8% higher than in March 2005 but 3.3% lower than in March 2021.
“This means families have less of their budgets to buy other necessities, like food, clothing, medicine and other things that are necessary for everyday living,” said Yannet Lanthrop, senior research and policy analyst with the National Employment Law Project.
Nadia Evangelou, senior economist and director of real estate research for the National Association of Realtors, said a family is considered cost-burdened when they spend more than 25% of their income on housing mortgage or rent and 30% on total house expenses.
The average American currently spends about 27% of their income on their mortgage, she said.
This is particularly acute for those who are living on extremely low incomes.
In Indiana, there are just 39 affordable and available rental homes for every 100 extremely low-income renter households, according to a study by Prosperity Indiana, the state’s community economic development association.
As a result, 70% of the most vulnerable renter households are severely housing cost-burdened, spending more than half of their incomes on housing, with little left over for basic necessities.
“You can imagine that if half of your paycheck goes to your rent and utilities, and you suddenly have a 15% increase in your rent, that you may be at real risk of being homeless,” said Andrew Bradley, the policy director at Prosperity Indiana. “Any unexpected expense, and now you're choosing between fixing a flat tire or paying your rent.”
In 2022, a full-time worker needed to earn an hourly wage of $25.82 on average to afford a modest, two-bedroom rental home in the U.S., according to the National Low Income Housing Coalition.
But that varies by location. In Texas, the hourly wage needed to afford a two-bedroom apartment is $22.54. It is $16.61 in Oklahoma, $16.97 in Indiana and $20.90 in Pennsylvania.
Each of these states has an average hourly rate higher than what is needed to afford a two-bedroom apartment, with Texas reporting an average hourly rate of $28.55, Oklahoma reporting $25.23, Indiana reporting $28.93 and Pennsylvania reporting $29.88, according to the Bureau of Labor Statistics.
Each also has a state minimum wage set to the federal standard of $7.25 an hour, a rate that has not changed since 2009. This leaves lower-income residents behind, Lathrop said.
While some fight to raise the federal minimum wage to $15, Lathrop said that would not be enough when accounting for inflation. Instead, the federal minimum would need to be closer to $17 or $18 per hour, she suggested.
Many Republican-led states are opposed to such a measure. Texas Gov. Greg Abbott, for example, said in a recent interview that raising the minimum wage would hurt small businesses and cost jobs.
Lanthrop said decades of research do not show that either would be the case.
“(Raising the minimum wage) just does not really affect overall employment or unemployment rates. Why is that? Because businesses actually have ways for them to adjust to higher prices and the high labor cost,” Lanthrop said.
Even so, real estate experts Perdue and Evangelou predict the housing market will soon cool off, reducing the pressure on wages to keep up with affordability.
Evangelou said the pandemic brought mortgage rates to a record low of 3%. While the rates jumped closer to 7% immediately following, they are dropping back down, currently sitting closer to 6%.
She said as the rates begin to stabilize, housing activity will again increase. This will, in turn, relax pressures on price and provide more opportunities for homebuyers.
“With more steady, stabilized mortgage rates, we expect the housing market to rebound (and) with home sales activity to increase by about 80% in 2024 compared to 2023,” Evangelou said.
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