Unless You Earn Six Figures, You Can Kiss That Dream Home Goodbye

Unless You Earn Six Figures, You Can Kiss That Dream Home Goodbye
Stéphane Renevier, CFA

over 1 year ago2 mins

If you want to buy a house in the US, you better be making a lot of money: $107,000 a year, according to real estate broker Redfin. That’s if you want to afford a monthly mortgage on a median-priced home, and that figure’s almost 50% higher than it was last year due to two main factors. For one, the Federal Reserve’s most aggressive rate-hiking campaign – a bid to calm inflation – has sent mortgage rates to the heavens. And for another, house prices have been stubbornly high this year, and they’re still rising – albeit at a much slower pace.

That’s bad news for the economy. Sure, shockingly unaffordable house prices won’t impact current homeowners with fixed-rate mortgages, but they’ll force prospective homebuyers out of the market. That’ll knock demand for houses down a peg, and house prices will eventually follow. And since consumers’ wealth – particularly that of poorer households – is tied to house prices, consumer spending will likely slow down too. That’s a problem: consumer spending makes up about 70% of the US’s economy, so that decline could really pull the economy down. On top of that, the wider housing industry – think construction companies and home equipment manufacturers – makes up a big chunk of the economy, as we explained here and here.

Now, I’m not saying we’re in for a repeat of the 2008 crisis. As we recently pointed out (see the links at the bottom), this time households are in better financial shape, the majority of mortgages are fixed, underwriting standards are a lot stricter, and there’s still a shortage of houses – and that all puts us in a better spot than we were in before 2008. Thing is, the housing market’s so important to the economy that such a brutal collapse in affordability will probably translate into a negative shock for the economy. That could certainly be enough to bring it into a recession, so don’t say you haven’t been warned.

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