By David M. Greenwald
Sacramento, CA – According to a report released at the end of October, new median housing prices reached an all-time high in August nationally. More worrisome for analysts is that was coupled with a decrease in median household income from 2019 to 2020, “a decline seen for the first time since 2011, with only modest rebounds so far in 2021, according to preliminary forecasts.”
According to Fannie Mae’s Chief Economist, Doug Duncan; “Affordability remains a challenge, even with mortgage rates near historic lows; if the pace of income growth doesn’t keep up with inflation and interest rates rise more than expected, we’d expect housing activity to slow from our current projections”
In September, Fannie Mae lowered its 2022 new construction home sale expectations from 846,000 units to 789,000. The problem was multifold – building supply constraints and record home prices.
The shortage of housing supply coupled with the increasing income gap means this crunch if going to disproportionately affect lower-income earners in 2022.
“Households in the bottom 25th percentile of income are estimated to face a shortage of 2.6 million units versus those above the median income expected to face a gap of 650,000 units,” the report said.
In order to afford a $390,000 home with a six percent down payment, the minimum total household income needs to be around $80,000.
That means that about 60% of US households would not be eligible.
That’s the national picture but it gets worse locally. The Sacramento region is the worst in the country along with Miami. The report found that 80 percent of households in Sacramento are priced out of buying a newly constructed home. Sacramento and Miami are followed by Las Vegas with 65%, Phoenix at 63% and Denver at 62%.
Compared to the national average, the median cost of a new home in the Sacramento Region is $650,000, requires an average down payment of $39,000 and an income of at least $128,000. The median income in the region is only $76,000.
First-time home buyers need to save for 21 months to afford a 6% down payment for a new home in Sacramento, behind only Miami, which was at 30 months, the report said.
The analysis by Knock shows that the burden of the housing crisis falls on lower income families.
“This analysis highlights how years of building undersupply and the current supply shortages are disproportionately impacting lower income homebuyers looking for alternatives in a housing market where homes are garnering multiple offers and selling for over asking price,” said Knock Co-Founder and CEO Sean Black.
He adds, “Although more new homes are expected to come onto the market in 2022, wages have not kept up with home price growth, keeping new construction out of reach for many, especially first-time buyers who don’t have the benefit of equity from a home sale.”
Clearly the situation in Davis is even worse than the Sacramento Region as a whole. While the new housing market may shut out new home buyers, it also opens up the market for resells, with people moving up to purchase new homes, opening existing stock for other potential home owners.
But these data do illustrate the perilous nature of the housing market in general. California has attempted to deal with the housing crisis by attempting to incentivize more infill and smaller, more dense units while at the same time the state and federal government have look into funding affordable housing.
What we have seen is a battle between local governments attempting to maintain local control over housing and the state government, attempting to incentivize and at times compel local governments to build more housing.
As we noted over the weekend, one big question is whether the state can and will compel cities to grow out by annexing additional land for housing on the periphery.
One of the more interesting comments over the weekend, “Housing mandates by the state may become part of the political pendulum.” There is a reasonable chance that you will start to see pushback against state imposing housing requirements on local communities.
But there is another side to that – the large and growing percentage of the populace that is currently shut out of home ownership.
If the housing crisis becomes politicized, it has the potential at least to really scramble political realities especially in California where the party is heavily divided on the issue of housing, and the constituency is very mixed in terms of wealthier home owners and less affluent people of color.
Davis is an interesting example here. We see a well educated, affluent community, but on the issue of housing it is heavily divided, with those who own homes more favorable to growth control measures and those who rent and tend to be younger, wanting to relax those growth control measures at least somewhat.
Those policies as we have noted are changing the character of the community – pushing families with children out, and making the city more bifurcated between long term home owners and younger renters.