That question was on my mind (yet again) as I walked around my local neighborhood in Sylvania, Ohio, taking note of the half-dozen or so Sears homes in the area. In the early twentieth century, this innovative solution (a major retailer offering build-it-yourself mail order homes) made affordable housing a reality for thousands of families.
A recent Fast Company article uses these homes as a way to put our current housing prices into perspective: In early 1923, your grandparents could have built a beautiful two-story Craftsman home from Sears for just $1,797 in materials. Accounting for inflation, that’s about $32,000 in today’s dollars. Let’s say you double that price to account for land and construction costs—that comfortable home would still only cost $64,000 in today’s dollars. And yet, recently in Boulder, Colorado, that very same home sold for over $1 million. Think about it. That’s an increase of 1,462.5%—not over the 1923 price, but over the already-adjusted 2023 price.
This home that was once the very symbol of affordability is now anything but. And it’s a story that’s playing out across the country in homes and communities of every kind.
U.S. home prices rose an eye-popping 45% between January 2020 and June 2022, as low interest rates and the surge in remote work spurred demand. For comparison, in the housing bubble that preceded the great recession 16 years ago, prices were up by only 30% over a comparable period.
Home affordability is out of whack with reality. Why? The biggest culprit is that home prices have drastically outpaced income growth. (The only index that’s worse is college tuition costs, which have increased by 169% over the past four decades, but that’s another topic.) Let’s take a look at the numbers.
House-Price-to-Income Index
Since 1965, (accounting for inflation) average home prices have leapt by 118% ($171,942 to $374,900), while median household income has increased by just 15% ($59,920 to $69,178). That means home prices have increased 7.6 times faster than income since 1965 and 3.1 times faster than income since 2008. And recently it’s only gotten worse. From 2019 to 2021, the pandemic drastically increased the average house-price-to-income by another nearly 15 percent.
All this nets out to an average house-price-to-income ratio of 5.4, which is more than double the maximum of 2.6 experts recommend.
Not-So-Fun Facts
- To afford an average home, Americans need an average household income of $144,192 — but the current median income is only $69,178.
- Nearly 90% of major metros have a house-price-to-income ratio that exceeds the maximum recommended ratio of 2.6.
- Only six of the 50 biggest major metro areas have a house-price-to-income ratio that is lower than or equal to the maximum recommended ratio of 2.6: Pittsburgh (2.2), Cleveland (2.4), Oklahoma City (2.5), St. Louis (2.5), Birmingham, Ala. (2.5), and Cincinnati (2.6)
- The least affordable metro areas for housing are concentrated in California: Los Angeles (9.8), San Jose (9.1), San Francisco (8.3), and San Diego (7.8).
Where We’re Investing Our Income
Another gauge of affordability is what percentage of a family’s household income (HHI) goes to their mortgage or rental payments. Experts historically recommended spending no more than 25-28% of HHI on a home. Recently, according to census data, we have seen both homeowners and renters regularly stretching well beyond that recommendation: nearly half of American renters are spending 30% or more of their income on housing, and for 23% of Americans, that number jumps to at least half of their income.
What’s the Good News?
The best news in all of this is that for many people, their home tends to be their biggest investment. As that investment continues to grow in value, it drives up homeowner equity. This is good news for 65% of the population that are homeowners. Because of this increase in equity, we have seen the percentage of homes with “underwater mortgages” decrease by half. And with more home equity (and higher rates) we will see homeowners stay longer in their homes and feel more comfortable spending more on home remodeling and replacement projects. This spending can help homes maintain their long-term value (making updates vs. just moving to get those features) and drives the R&R market for building products materials and contractors.
Will This Hold or Crash?
Experts are saying that even though we’ve seen an escalation in home prices, we’re probably not going to see prices continue to grow exponentially. On the other side, they don’t believe we will see them crash anytime soon either, given the supply and demand dynamics. Housing inventory is the key factor, with the supply last year being only about a fourth of what it was in 2007. When you have too many buyers chasing too few houses, that’s going to hold the market in check.
Millennials (the largest population) are also quickly becoming the largest group of homebuyers, so this will continue to drive market dynamics. Their issue is that affordable options (there’s that theme again) are few and far between as builders continue to leave entry level home inventory needs unaddressed.
The lack of affordable single-family homes is forcing many would-be homebuyers into multi-family (MF) buildings and is why that segment has seen exceptional growth. This trend is not good for the other 35% of non-homeowners, renters, who’ve seen average rent prices increase 8.85% per year since 1980 but have recently skyrocketed by more than 30% in the past 2-3 years.
Prices will settle, but when and how far is still a debate by many economists.
Takeaways
You cannot control the economy or what happens with home prices, but you can control how you position yourself in the market. For manufacturers and suppliers in the building materials sector, the best things you can do are:
- Optimize Product Mix
Prices will come down, and expectations on material costs will come down as well. Spend time optimizing your mix to higher mix products that add additional value so you can offset the price decline that is coming on your products.
- Optimize Segment Mix
SF new construction is down while MF and R&R are still robust. Make sure you have the right products and placement to leverage the strength in the growth segments.
- Know Key Audiences Deeply
Invest in understanding the audiences that will drive the future market and create a more relevant product offering, customer and brand experience for them.
