Has Home Ownership Become a Distant Dream?

The answer will have a major impact on home goods retail 

By Joe Higgins, Quest 4 Quality 

Many consider home ownership a bedrock of financial security and a cornerstone of family formation and social order. And filling that home with furnishings, major appliances and consumer electronics is what keeps BrandSource dealers in business. 

Unfortunately, now is not a fun time to be looking to buy a house, and it does not matter where you live or where you might be planning to settle down. 

It also doesn’t matter if you are a baby boomer, Gen Z’er or a millennial; you are still affected because America is in the worst stretch of inventory shortages, price appreciation and bidding wars in its housing history. What will help is if you currently own a home with some equity, have enough cash to cover a down payment or have a significant income. 

If you thought you would see a return to normalcy as the summer selling season started, that ship has sailed. At the time of writing, interest rates had risen 2.75% over the past year, the Fed was expected to take another substantial rate hike, and home prices were rapidly increasing. As I said, it is not an enjoyable time to be house hunting. 

In June, the Consumer Price Index revealed that inflation was still on the rise as it increased 8.6% year to date. With that news, the Federal Reserve was expected to move the federal funds rate another 50 to 75 basis points higher to slow down the economy and gently pull back the inflationary spiral plaguing consumers. The effect, according to the consensus, was that the 30-year mortgage rate would have exceeded 6% for the first time in 40 years by the end of June.  

Let me do the math for you: If you bought a house on July 1, 2021, and paid $500,000, your interest rate would have been 3.04%, and your payment would be $2,119. If you bought the same house a year later, your estimated interest rate would be 5.85% and your payment would be $2,950. Fewer Americans can afford to purchase a home in this country at these levels. Keep in mind that my example did not factor in the 20% increase in housing costs over the past year.  

Why is this the case? The experts say that home values have risen significantly faster than incomes, so much so that only 30% of Americans can afford to buy a house. Over the past ten years, home prices are up 34% according to Zillow, while Bank of America says household incomes have only increased about 13%. In addition, in the years since the pandemic began the disparity between the rapid escalation in the price of housing and total household income has grown exponentially worse. 

It has become clear that the higher interest rates go, the higher the percentage of our citizens will not be able to afford even starter homes. This is not easy to say, but it looks like a family with an average income will be locked out of home ownership. Only those with prior home equity, lots of cash or high incomes can buy medium to higher-end homes, which have now become luxuries in America.  

So, is there any hope? There are some early trends, but these are well out in the future. The market is still defined by massive shortages that will not end soon and higher interest rates that will only go higher. 

More houses will come back on the market as sellers do not want to miss out on the price appreciation over the past two years, thus raising inventory levels. As inventory goes up, homes will either drop in price or the acceleration will slow. Bidding wars might go away as inventory rises. About 17% of Zillow’s June listings were showing lower prices, something we had not seen since the pre-pandemic era. Buyers should be cautious, though; inventory currently is still about 48% less than it was in 2019. 

So here is my bottom line on housing: Inventories will get a little better, but it will be two years before any meaningful change comes to buying a home. Interest rates will have moved above 6% this summer, and sales of single-family homes will slow down slightly. With high home equity rates, there will be more home remodeling, especially in kitchens. Home values will rise above the historical average, and pricing acceleration will slow to about 8% over the next year.  

If you own a home, be thankful you do not have to deal with the most chaotic market in decades. And for the sake of home goods retail, let’s hope those legions of renters find their dream houses soon. 

Joe Higgins is a 44-year veteran of GE and Whirlpool Corp. who brings his experience to bear as a business consultant, public speaker, AVB keynoter and YSN contributor. Visit his website, Quest 4 Quality with Joe, at www.q4qwithjoe.com.