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The State of Housing Confidence in 2018

Taylor Cenicola

Owning a home was once a time-honored life milestone. Buying real estate was simply what you did as an adult in America, and for many people home ownership was the ultimate indicator of life success and social status. But, times have changed.

Today, less people are buying houses. According to Fannie Mae, a mere 24 percent of Americans feel like now is a good time to buy a house. Looking back to 2013, when 54 percent of consumers were confident in the housing market, it feels like a lot has changed in a small amount of time. It's clear that the certainty of prospective homeowner is waning.

The housing market is far from a perfect science, but there are some trends that could be influencing homeowner behavior and confidence such as:

  • Rising house prices
  • Salary stagnation
  • Generational trends
  • Record high interest rates

All of the above have hurt consumer housing confidence. How did we get here? Let's unpack the above drivers to better understand the state of homeownership in 2018, and what the federal government is doing to reinvigorate the housing market.

Rising house prices

Houses are getting more expensive — period. A recent Zillow report found that the median home value is around $1 million in 197 different cities. This year alone saw the addition of 23 more cities to this not-so-exclusive club.

This data is not reflective of metropolitan areas alone, and, in fact, this trend should concern any prospective homeowner regardless of location. According to a National Realtors Association report, the median price of a single family home is nearly $50,000 more expensive than two years ago.
Rising home prices would be a reasonable outcome of inflation, but only as long as salaries grew proportional to the housing market. And yet, herein lies a major contributor to decreasing housing confidence: salaries are not keeping pace with home prices.

Salary stagnation

According to Pew Research, "Today's real average wage (that is, the wage after accounting for inflation) has about the same purchasing power it did 40 years ago. And what wage gains there have been have mostly flowed to the highest-paid tier of workers."

The rise in house prices is far outpacing salary growth, and this has serious implications on the financial mobility of American families. In the current market, 1 in 200 people will experience home foreclosure, and anyone who undertakes homeownership without a very reliable income stream runs the risk of becoming one of these statistics.

Otherwise, many Americans are simply avoiding homeownership altogether. When it comes to the newest generation of homeowners, many young people are buying in to never buying a house.

Generational trends

One of the greatest threats to the housing market is the consumer habits of young people. Millennials have already ruined Applebees and golf, and some experts predict the housing market could be the next victim of emerging consumer trends.

According to Business Insider, Millennials are buying homes at a slower-than-usual rate. In the past, 25 – 34 was the typical age to start shopping for houses, but it seems Millennials are lagging behind. Data shows a major deterrent for young people is saving enough money for a down payment.

Financial inhibitors aside, there is a more universal reason Millennials aren't buying houses: young people simply have a different set of values. They are holding off on marriage, having kids older, and moving frequently. Millennial value systems cannot be traced to a single factor but the following points likely contributed to their shifted priorities:

  • Distrust in the housing market: Childhood during the Great Recession has made first-time homeowners skittish of the market — 78 percent of Millennials consider the recession a factor in their decision to buy real estate.
  • A lack of job security: Millennials are known for job hopping. In fact, 91 percent of Millennials expect to stay at one job for less than three years.
  • Record high student debt: The student debt total has reached $1.4 trillion. With most graduates entering the workforce saddled with $30,000, or more, in student debt, buying a house is likely not a top priority.

Record high interest rates

Mortgage interest rates have reached an all time high of 4.66 percent — an entire percent higher compared to this time last year, and a record high since 2011.

A minor interest rate increase is not worth losing sleep over, but even a little bump can have a huge effect on the cost of homeownership. For example, 3/4 of a percentage point increase in mortgage rates would increase the monthly payment of a $200,000 mortgage by about $85.

As established above, first-time owners are already nervous about plunging into the housing market pool, but high mortgage rates impact another, surprising, demographic: current homeowners.

Homeowners that would normally sell their houses and upgrade to bigger ones are staying put due to high interest rates. It simply doesn't make financial sense to forfeit a low interest rate for a higher one. High interest rates prevent mobility — someone who might have owned three houses in a lifetime will generally stick to one to avoid unreasonably high interest payments. This is bad for the housing market and even worse for anyone looking to own more than one house in a lifetime.

Federal housing legislation

What does all of this amount to?

First and foremost it's important to know that the housing market isn't doomed — housing will always be an important American economic driver and there will continue to be real estate demand for the foreseeable future. That's not going to change. But, lawmakers concerned with the recent dip in housing confidence are taking measures to help the market rebound.

For example, FHA loans are a common form of governmental aid for first-time homeowners and designed to help individuals with little savings and struggling credit secure a mortgage. FHA will guarantee loans so lenders will accept applicants that wouldn't typically be approved. With the help of FHA backing, borrowers can qualify for loans with only 3.5 percent down.

There have been rumblings of more housing reform for over a decade. Just last year several states passed legislation to allow tax-favored accounts to help first-time homebuyers save for a down payment.

There is help out there as long as you know where to look. Homeowner financial assistance varies by state, so the U.S. Department of Housing and Urban Development has compiled a list of programs to help prospective homeowners find the support they need.