Middle-class homebuyers face the worst housing shortages, survey finds
The housing shortage is hitting middle-income homebuyers hardest.
While 51% of earners in the nation make $75,000 or less, only 23% of available home listings are affordable for these households, according to a report published by the National Association of Realtors and Realtor.com. The situation is even worse in cities like San Jose, Calif., and New York where only 5% and 13% of respective available listings are affordable for these families.
However, higher-income folks have more options in their income bracket. While only 7% of households make $250,000 or more, they can afford 85% of listings shown.
The disparity is an important consideration when policymakers, homebuilders, and real estate professionals debate ways to address the national housing shortage, so certain families aren’t left empty-handed or forced to buy a home outside their budget.
“The housing affordability issues would not be so severe if homes were dispersed in a more adequate match for the distribution of households by income level,” Nadia Evangelou, senior economist and director of real estate research at the National Association of Realtors, told Yahoo Finance. “That’s the reason we need to have a more targeted approach when we say we need to build more homes.”
The report calls for nearly 320,000 more houses for sale at a price below $256,110 to maintain a healthy inventory supply for this cohort, a shortage problem that has been exacerbated in the last five years.
In 2018, nearly 50% of home listings were affordable for families in the $75,000 income bracket, according to statistics provided by the National Association of Realtors. That number slowly declined — with the exception during the 2020 pandemic — to 23% in April 2023, when it was more than halved.
“It is both disappointing and devastating,” Joanna Smith- Ramani, co-executive director of the Aspen Institute Financial Security Program, said about the decrease. “But it’s not really surprising at all.”
There are many reasons behind the middle-priced market shortage. Most recently, the rapid run-up in mortgage rates have convinced homeowners who would have considered selling their homes to stay put. These previously-owned homes often are more affordable than their new home counterparts and serve as an important entry point into homeownership.
“If you need to abruptly or urgently move right now, it’s going to be very expensive and very hard to figure out,” Smith- Ramani said.
For reference, this spring new homes made up a third of the for-sale inventory when these properties make up 12% to 13% in a typical year.
There’s also been persistent underbuilding in the last decade following the housing crash that preceded the Great Recession. But homebuilders’ business models are also to blame.
While developers can receive government subsidies to develop lower-income homes, they have largely chosen to build luxury products with higher profit margins to offset the increase in supply and labor costs.
“Part of that calculation is, what am I allowed to do through permitting, what’s going to be the easiest thing to be approved, so it costs me less if I can quickly get stuff out,” Smith- Ramani said, “versus fighting with the community over whether or not to build multiple smaller homes on a small lot.”
“The question then is, is there a profit business model for the middle of the country?” Smith- Ramani said. “Probably not, if we’re not seeing people do it.”
Recent migration patterns are also pushing up prices, especially in the traditionally more affordable cities, according to experts. As the pandemic accelerated the work-from-home culture, many workers moved from higher-cost cities to lower-cost ones. But the transition raised prices in the affordable cities without a symmetrical drop in the pricier market.
“If you take people out of an area, it may make the area a little more affordable, whereas if you add people, that definitely has the pressure of making it unaffordable,” Sabelhaus said.
“Because the price of the houses probably can’t fall too much further; it’s asymmetric.”
On top of the changes in supply and demand throughout the US, raising interest rates has also shifted available and affordable homes to a higher income bracket.
“The interest rate increase right now also means that people that could afford higher than $250,000 houses no longer can because their mortgage is more expensive to them,” Smith- Ramani said. “So you have higher-income folks eating up lower-cost housing.”
Middle-income families in expensive cities see a similar unaffordable trend as the rest of the nation; the only difference is that middle-income is higher in these locales — around $100,000 to $150,000 in annual earnings.
“Usually, the larger shortage is where the middle-income buyer is at locally,” Evangelou said.
“The median household income for San Jose is $150,000, so that’s where the shortage lies.”
Over 50% of households earn $150,000 or less in the San Jose market, but only 5% of homes are affordable for this income bracket. Nearly 1,300 more homes listed for under $635,630 are needed to stabilize the market.
A similar phenomenon is occurring in the New York-Newark-Jersey City area. Slightly more than half of the households make $100,000 or less, but only 13% of homes on the market are considered affordable — priced at $316,120 or less.
Renters can’t graduate
It will take both the public and private sectors to work together to solve the housing shortage problem.
“If we still do zoning that doesn’t allow us to do lower-cost housing, we will never get the supply we want,” Smith- Ramani said. “It’s so frustrating because it’s unnecessary. We have the resources and the creativity and the innovation to create something totally different and better.”
Evangelou, though, thinks the market could take a while to normalize because increasing housing supply takes time.
Builders — some of which recently are looking to pare back their luxury offerings to target entry-level buyers in the market now — are still contending with longer-than-normal completion times because of labor and supply issues. Many homeowners will eventually list their homes once mortgage rates soften a lot more, which so far doesn’t appear in the cards this year.
“I don’t expect that to happen next year. Probably after 2025 we may see something,” Evangelou said.
But for now, “there’s no natural graduating from low-cost renting to middle-class renting to home purchase,” Smith-Ramani said. “People are not graduating right now appropriately.”
Rebecca Chen is a reporter for Yahoo Finance and previously worked as an investment tax certified public accountant (CPA).
Click here for the latest personal finance news to help you with investing, paying off debt, buying a home, retirement, and more
Read the latest financial and business news from Yahoo Finance
