From the grocery checkout to the electric bill, prices have shot up. Same goes for real estate.
Most people in the United States simply don’t have the same ability to buy a home as the people of their parents’ and grandparents’ generations. And that’s changing the U.S. class system — according to real estate industry people themselves.
Property values surged 10% in 2020, and nearly another 19% in 2021. By 2022, Redfin’s chief economist was telling CBS that “the middle-class dream of homeownership” was “fading away,” and that owning a home is now a “signifier of the upper class.”
Harder to Buy, Harder to Rent
Everyone’s situation is unique. Some people have very good reasons to rent. Some simply have a preference for doing so. And that’s fine. That said, it’s also true that today’s renters can find it difficult to accumulate substantial savings as they continue to pay monthly rent. Getting enough money together for closing costs and a down payment could be impossible — if the time does come when they’d like to buy.
All things being equal, those who have opted to buy real estate, especially in a low-rate environment, accumulate more wealth (in the form of home equity) than they would have gained otherwise.
And indeed, many people have been buying. The thing is, today’s buyers are now wealthier than most. And first-time buyers are underrepresented among buyers, says Zillow.
The ones who took out mortgages and bought homes are paying down the debt, month by month. Most of these buyers – without having to take any other action – are watching their property values increase. So, the worth of their total financial assets goes up. This is the way ownership encourages wealth accumulation.
That’s a common-sense description we frequently hear. But what’s surprising is the impact of equity-building in dollar amounts. Here is a startling figure from the National Association of Realtors which CBS News cited. A senior economist for the industry group told the news site that homeowners typically have 40X the wealth held by renters!
Even before the pandemic, the difference between the assets held by the two groups was huge. A government study done before Covid-19 showed that the median U.S. owner held $255,000. A renter’s wealth, in contrast, was $6,300. That is a massive gap.
Buyer/Renter Wealth Gap Is Swelling
Most people who bought real estate before the 2020 price surge happily saw their home equity climb — sometimes remarkably so. Even if home values are dipping slightly, those homeowners had a cushion, so they’re still well ahead.
For this reason, the difference in a renter’s wealth and an owner’s wealth is at new highs.
People who did not buy before 2020, according to Zillow, are now facing typical monthly mortgage payments that doubled during that same real estate price surge.
By 2022, the U.S. central bank was ratcheting up interest rates. Inflation was soaring, and the Fed worked on cooling it down through its rate hikes. The rate hikes rippled out to the mortgage industry. Home loan rates rose from 3% to 4%, then higher. Soon they were touching 7%.
This sharply changed the amount of money required for buying a home. And it sidelined prospective home buyers of all ages — mostly people trying to buy their first homes and get “on the ladder” of ownership.
Across the country there are just about a quarter of a million homes on the market within the borrowing power of anyone who earns under $100K. Before the pandemic, that number was more than double.
To put it mildly, there are more hopeful buyers than there are homes they can afford to buy.
Some Pool Their Resources
This imbalance between demand and supply is keeping real estate pricey. And it’s not as though renting’s cheap, either. Some buyers have managed to get mortgage approvals for fixer-uppers. Other first-time buyers have purchased condos. Yet those opportunities, too, are out of reach for many.
For some first-timers, the tenancy in common can be a workaround. In this approach, co-owners obtain percentages of ownership in the home property.
Tenants in common can be relatives or co-workers, friends, or life partners. Each may hold any portion of the whole value, with their deeds showing their ownership percentages. (In contrast, in the common joint tenancy vesting, co-owners share ownership equally.)
So, even though they combine their resources to buy into the market, each owner builds equity personally, in their own name.
The co-owners in a tenancy in common can, individually, borrow against their own share. Each is free to sell their own interest, as and when they wish. Each is free to create intergenerational wealth by bequeathing their ownership share to designated beneficiaries, using a will.
And the owners are free to bring a new person into the fold any time. They can convey their deed from the current group of people, into the names of the expanded group.
Reasons for Hope?
So, the competition for homes continues. This is the market reality now. In 1960, more two-thirds of U.S. adults could buy homes. Today, only 43% of U.S. adults can afford real estate.
Even people who plan ways to co-own their homes are not having an easy time landing homes they can afford. Buyers are trying to get the attention of sellers in all sorts of creative ways, a Nashville real estate agent told CBS News. One hopeful buyer even offered some bitcoin to sweeten a deal. (Reportedly, the seller accepted.)
Analysts are offering at least a little good news. They expect interest rates to come down. According to the Mortgage Bankers Association, mortgage rates could drop well below 6% by the end of 2023. Plus, the seller’s market is beginning to cool off a bit. Prices have come down in key metro areas.
Another reason for hope is the level of attention housing affordability is receiving, all the way up to the White House. It’s putting pressure on states, towns, and cities to allow greater density in zoning — more housing per lot.
We wish all hopeful buyers the best possible success out there. Readers should note that we offer this article to share news and general knowledge, not financial advice. As always, speak with an accountant and a mortgage professional for case-specific financial guidance.
Supporting References
Brianna Scott for National Public Radio via NPR.org: Buying a Home Became a Key Way to Build Wealth. What Happens If You Can’t Afford To? (Jan. 9, 2023).
Lauren Bird for MoneyWise.com: Did You Buy a House Before the Pandemic? If You Waited Until Last Year or You’re Still Renting, You’ll Likely Be on the Wrong Side of a Growing National Wealth Divide (Jan. 6, 2023; citing figures from a U.S. Federal Reserve study).
Aimee Picchi for CBS News – MoneyWatch, with the Associated Press contributing: For Most Americans, Owning a Home Is Now a Distant Dream (Feb. 23, 2022).
Deeds.com: “Growth Recession” 101 – A Guide for Homeowners (Sep. 2, 2022).
Deeds.com: Owning Property in Unequal Shares, as Tenants in Common (Jul. 16, 2020).
American Land Title Association via Title News.com: Journey Toward the True Digital Mortgage (undated).
And as linked.
Photo credits: Andrea Piacquadio, Mikhail Nilov, and Fotograf Jylland, via Pexels.