Real estate prices in America have been a roller coaster ride in the past decade, from wild declines eight years ago to today’s affordable housing crisis in America. Prices have gotten so high in some areas, that it theoretically takes more than 100% of an average worker’s salary to afford a home in their own neighborhoods.
Wreaking havoc just over the bridge
In today’s new economy, high-paying jobs for American workers are hyper concentrated in an handful of areas around the country. If you live in places near the San Francisco Bay area or New York City and have in-demand skills, you can probably land a very lucrative job. These new job epicenters are creating a class of handsomely paid folk, who have the disposable income to purchase their own homes close to their work. As a result, housing affordability is declining rapidly in cities and suburbs where high-wage earners-are most prevalent.
Some of the most overheated real estate markets aren’t just in places you would expect like Manhattan or the city of San Francisco. They’ve also stretched out to neighboring communities just over the bridge from these two hot job markets, like Brooklyn and Marin County, respectively. These newly minted “high-income suburbs” are ground-zero for today’s housing affordability crisis.
The metric of doom: Income relative to median home price
The Q3 2016 Home Affordability Index by ATTOM Data Solutions, calculates affordability by comparing an area’s average income versus the same area’s average home price. According to this study, the most unaffordable place in America is Brooklyn, where the “percentage of average wages required to buy the median home in the area is 123.5%.” The picture- perfect ocean side city of Santa Cruz, California (close to Silicon Valley and San Jose) comes in as the second-most unaffordable place in America at 111.1% of average wages to buy the median home.
People making bank in these city centers are gobbling up real estate in areas that are more affordable just over the bridge, because they have been priced out of places which have also become dangerously unaffordable. This trend shows little sign of slowing down and many more high-income suburbs are bound to sprout up around cities with healthy job markets.
How did this happen? Low interest rates and strict zoning laws
Many believe the real estate market is overheated in because of ultra-low interest rates, which makes mortgages much cheaper than they have been historically. While lending is not nearly as loose at was before the Great Recession, you might recall that an over-financed housing market nationwide caused the last financial crisis.
The other phenomenon that’s driving the affordability crisis is strict zoning regulation. Out of date laws in many cities make increasing density an impossibility. This means that in many cities, new construction is either outright impossible, or so expensive that the price of new units is in the stratosphere. Like anything else, if you’re restricting supply while demand is high, prices go through the roof.
What do we do now?
Housing affordability is becoming a major problem all over the country, even in metro areas that have been historically reasonable. People are leaving expensive metro areas for greener pastures, and in turn raising prices in areas far away from lucrative job markets. Fortunately, as interest rates rise, some real estate markets may cool as mortgages become more expensive to consumers. Real estate prices fluctuate, and the upward march cannot go on forever.
Fixing our broken zoning laws is a much harder task. The Obama Administration released their own report on the matter last year, and identified many zoning and land use laws as extremely destructive policies. From driving economic inequality, to reducing our country’s overall economic growth, the effects of many of these strict laws are devastating. It’s become apparent that zoning and land use will need to evolve to meet the demands of the 21st century.
Rising real estate prices are yet another example of how baby boomers are greatly benefitting from the new economy, and millennials are completely missing out. If you happen to own property in one of these overheated markets, and are close to retirement, it pretty much amounts to winning the lottery. Many longtime residents are cashing out and making more money than they’ve made in their entire working career.
For millennials, we’re getting the short end of the stick. For those who studied hard and landed a great job, congratulations, you’ve been selected to burn half of your income for a barely habitable apartment within commuting distance to your “dream” job.
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