Browsing through today’s top new stories, I came across an whopper of an article titled “Why It Seems Impossible to Buy Your First Home” published in the Washington Post (the link to the full article is at the end of this message in case you’re interested in reading the whole thing).
The article was well-written and the facts are just as depressing as you can imagine they would be based on the title. But I will summarize it for you here.
The piece was based on a recent market analysis report from home-search website Trulia.
Essentially, the article goes on to detail the top reasons why it seems impossible for young folks / young families (pretty much Millennials) to purchase their first “starter” home.
The starter home is generally a smaller place, maybe not in your favorite location or lacks many of the “perfect” features you want in a house, but will do for the time being so you can start building equity and growing your wealth.
However, the barriers to achieving the goal of owning your first home are becoming more obvious and glaring with each passing month.
The article lists a few reasons why the ability to afford one of these “starter homes” is not only extremely challenging, but quickly becoming just plain impossibly out of reach.
Reason #1: after the financial crisis, when prices of real estate crashed by around 40-60% in most metros, investors (mostly private equity and hedge funds) came in and scooped up a good chunk of the lower-priced homes to turn into rental units.
This activity, albeit reduced from its peak in 2012/2013, is still going on today in most cities. In fact, your more traditional “mom & pop” investor and even flippers are now picking up where the hedge funds left off and are looking to profit in the low-priced housing segment, soaking up a lot of the inventory that would normally go to young buyers.
Reason #2: those folks that purchased a so-called “starter home” leading up to or during the prior financial crisis, are still underwater on their mortgage (or even in some stage of the foreclosure process) and literally can’t sell their homes, without taking a huge capital loss.
Reason #3: ahh, now this is the kicker, the shadow reason why “starter homes” are so un-affordable in the U.S. today…The rapid increase in prices….wait though, it’s not just because of the reasons listed above that are driving prices up...but because of the parabolic rise in prices of the TOP-TIER housing stock.
The premise is, because home prices are rising so quickly in the most expensive segment of the market (the high-end homes), it is causing a chain reaction that makes those on the lower rungs of the housing ladder really feel the pinch.
The logic goes like this….
If the price of what was a $1 million dollar home 5 years ago is now $2.5 million (which is actually happening in some metros), someone looking to jump from a $600K house to that higher segment just got priced out!
That means the guy in the $600K house won’t / can’t sell to move up. Which also means the guy in the $350K house has nowhere to move up to, and so on and so forth, all the way down the housing ladder.
The result is that more middle-income, would-be homebuyers (what some might call middle class or affluent, are forced to buy more and more of the homes in the lower-priced segment, exacerbating the tight supply and driving prices even higher for the bottom grouping of income-earners.
To quote Trulia’s chief economist Ralph McLaughlin, “the number of starter homes on the market in the 100 largest U.S. metros has dropped by about 44 percent since 2012.” McLaughlin goes on to say, “...[and] who bears the brunt of that downward pressure on the ladder? Well, it’s starter home buyers. They get squeezed out."
The concept of being “squeezed” is exactly what we at Wealthy Millennial believe is the overarching trend for our generation. And this is just another perfect example of how that concept is manifesting itself in the real economy.
This pressure on young home buyers is the primary reason why apartment rents continue to rise at a 7 to 8% clip per year (even higher in some metros) because there’s just no other option for our generation for housing.
It also creates a vicious cycle because the lack of reasonably-priced housing leads to more renters, which leads to a tighter apartment market, which leads to high rents, which makes it harder to save for the down payment on a starter home that keeps rising in price thanks to this disconnect between home prices and income.
This is just another layer in the pile of crap we Millennials have to wade through to make ends-meet in this economy.
P.S. be on the lookout for our
Wealthy Millennial Podcast coming soon!!
Link to Full Article
