Inflation Drives Housing Further Out of Reach for Many Would-be Buyers

Inflation Drives Housing Further Out of Reach for Many Would-be Buyers

Young families looking to purchase their first home may have to rent longer than they had hoped. This is the outlook posited by real estate investors, banking analysts, and leading economists in a recent Wall Street Journal article reporting that affordability for buying a home is at its lowest point in 20 years.[1]

Though sky-high housing prices have been making headlines for the past several years, an extended period of (very!) low mortgage interest rates kept many active buyers in the market. Before this year, the Federal Reserve had not increased interest rates since 2018. However, the Fed has already raised rates three times this year, with more increases projected on the horizon.

These interest rate moves pushed mortgage rates on a 30-year fixed rate loan to almost 6% in June. While still historically low, each added point increases monthly mortgage costs by hundreds of dollars (or even thousands in the nation’s priciest markets). In fact, S&P analysts believe the increases to mortgage payments may force more than 50% of potential home buyers out of the market![2]

In June, the annual inflation rate jumped to 9.1%—the highest since November 1981 and well beyond the Fed’s targeted 2% annual rate. Gasoline surged by 60%, food costs have gone up 10.4%, and shelter expenses increased by 5.6%.[3]

There can be a silver lining to price increases. Inflation often drives household incomes upward, courtesy of pay raises for workers and cost-of-living adjustments for pensioners, for example.

Yet for many Americans, inflation is outstripping historically strong pay growth.

In the home market, it’s a double whammy: still-high home prices and a high inflation environment affecting daily living costs are eroding the purchasing power of many would-be buyers. Folks who may have stashed some cash in their quest to be homeowners are involuntarily pulling themselves out of the buying market. The down-payment piggy bank now is needed for higher bills.

Along these lines, the Mortgage Bankers Association reports that mortgage applications have fallen to the lowest level since 2000. This report, which is commonly used to assess interest in home buying, is another indicator that people are holding off as they realize that home ownership may be out of their reach.[4]

While home prices likely will decline if interest rates stay at a sustained higher level, a modest price reduction of 5%, 10% or even 20% may not offset the increased cost of a higher mortgage rate.

As a result, many younger families that would otherwise consider buying their first home are relegated to being part of America’s “Renter Nation”.

For all of these reasons and more, commercial real estate investments, particularly those tied to housing (think multifamily, single-family rentals, manufactured housing and student housing), may provide an attractive “shelter” from inflation concerns for investors.  For current owners interested in riding the renter nation wave, but who are ready to retire from being a landlord, there are passive real estate investments that may allow investors an ability to move from an active to a passive role of real estate ownership on a tax-deferred basis.

For more information about tax-advantaged securitized real estate investments, please call 1031 Capital Solutions at 1-800-445-5908 or visit our website, 1031capitalsolutions.com.

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[1] Housing Affordability Index Drops to Lowest Level Since 2006, Wall Street Journal, July 8, 2022

[2] Housing Affordability to Drop to 2007 Levels Says S&P, Bloomberg, July 20, 2022

[3] United States Inflation Rate, Trading Economics, June 2022

[4] US Mortgage Applications Drop to Lowest Since Early 2020, Bloomberg, July 7, 2022