It has never been more challenging for first-time home buyers to enter the real estate market. With the Fed tightening credit conditions — pushing mortgage rates close to 7% as we go to press – stubbornly high prices mean that 70% of Americans cannot afford to buy a home in their state. And because they are forced to rent, a large portion of their income goes toward housing that won’t increase their wealth. In the last few months, the housing market has changed dramatically for buyers, sellers, and agents across the country.

Our sister company, Asset Strategy Advisors, is in contact with money managers in this space all the time. Our advisors meet with real estate equity fund managers every few weeks that are stepping into the breach. In many markets, they have been able to finance large, garden-style residential communities where the occupant has a nice, satisfying alternative to living in an apartment. These renters now enjoy home-style living. But, at the end of the day, they are still renters, and it’s because they can’t afford the down payment and mortgage payments necessary to buy even a modest home.

This affordability crunch is no surprise. First, while you may not look at data from the St. Louis Fed every day, you’re likely aware that the median sales price for houses is at an all-time high. Coupled with the higher cost of borrowing, that has pushed the Housing Affordability Index down by about 33% just since August of 2021. The index is at the lowest level it has been since 2006.

House Method, a website that provides research for people looking to improve and maintain their homes, has put together a comprehensive article entitled “Millions of Americans Are Being Priced Out of the Housing Market.” This article digs into the (non) affordability of housing in each state. The more we investigate the issue, we find that the problems are not only the cost of real estate and financing. It is that wages are clearly not keeping pace with inflation. Think back to the renters we just mentioned above. They are making an average of $90k per year and should be able to afford to own. But with the costs of living now, it remains a dream. Ex: A rule (which now looks outdated) says a person shouldn’t spend more than 28% of their pre-tax income on a mortgage payment. When you see this report, you’ll discover that in 48 out of 50 states, we spend more than one-third of our average monthly income on housing, blowing the 28% rule out of the water! In the article, you’ll find a table with the average salary, home price, monthly mortgage, and percentage of income spent on housing for each state. Sneak preview: The only states that meet the 28% rule are Alabama and Wisconsin. 

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Homeownership is a primary means of building wealth and ensuring financial sustainability across economic cycles. While higher mortgage rates should eventually drive home prices down, the real estate market – like many other things post-Covid – is dancing to its own tune right now. And when prices do become more reasonable, mortgage rates will likely be higher. It will take some time for affordability to improve. The economy is changing so quickly, though, that there may soon be a light at the end of the tunnel. writes about the 10 U.S. Cities Where Home Prices Are Dropping the Most Right Now. A glimmer of hope may just be making its way through.