Homeownership is getting harder to achieve!

How lack of wage growth has led to more renters.

I am currently reading the Book “Adrift” by Scott Galloway

I like his clear style based on lots of data.

When I say read, I really mean listen as an audiobook, and I crosscheck with the accompanying PDF. In that PDF, Scott has a lot of graphics and tables, and two of them really gave me pause.

Even though Scott explains the relationship and what the data shows really well, I wanted to learn and let you know what the impact on our investments is and how much we benefit potentially form less and less people being able to reach homeownership. Here is what I found:

The Consumer Price Index (CPI) measures the average change in prices paid by urban consumers for a basket of goods and services over time.

The CPI is calculated by the U.S. Bureau of Labor Statistics (BLS) and is released monthly. The CPI can be used to analyze the inflation rate, the cost of living, and the purchasing power of consumers.

One way to look at the CPI is by expenditure category, which groups the items in the basket according to their function or purpose. For example, food, energy, housing, transportation, medical care, education, etc.

The BLS provides data on the CPI for all urban consumers by expenditure category for the U.S. city average, as well as for specific regions and metropolitan areas.

According to the latest data from September 2023, the CPI for all urban consumers increased by 0.4% from August 2023 to September 2023, and by 3.7% from September 2022 to September 2023.

Some categories have experienced higher inflation than others over the past year, such as shelter, food, and all items less food and energy. On the other hand, some categories have experienced deflation or lower inflation than others, such as energy and medical care.

One possible explanation for the different inflation rates across categories is the impact of the COVID-19 pandemic and its aftermath on supply and demand conditions in various markets.

For example, the pandemic may have reduced the demand for travel and transportation services, leading to lower prices for energy commodities such as gasoline and fuel oil.

The real median income is the income of the person in the middle of the income distribution, adjusted for inflation.

The real median income is calculated by the U.S. Census Bureau using data from the Current Population Survey (CPS), which is a monthly survey of about 60,000 households.

The real median income reflects the purchasing power of income over time and is used to measure the economic well-being of households and individuals.

One of the expenditure categories in the CPI is shelter, which includes rent of primary residence, owners’ equivalent rent of residences, lodging away from home, and tenants’ and household insurance.

Shelter accounts for about 35% of the CPI basket and is one of the main drivers of inflation.

According to the BLS, the shelter index increased by 7.2% from September 2022 to September 2023, which was the largest 12-month increase since November 1982.

The real median income, on the other hand, increased by only 1.8% from 2022 to 2023, according to the Census Bureau.

This means that the income growth of the typical person did not keep up with the inflation rate, especially in housing costs.

As a result, more and more people may face affordability challenges in finding adequate and suitable housing.

One way to measure the affordability of housing is to compare the median rent or mortgage payment to the median income. The U.S. Department of Housing and Urban Development (HUD) defines housing cost burden as paying more than 30% of income for housing expenses.

According to HUD, about 37% of renter households and 25% of owner households were cost-burdened in 2019. These percentages may have increased in 2023 due to the rising shelter prices and stagnant income growth.

Another way to measure the affordability of housing is to compare the homeownership rate to the real median income.

The homeownership rate is the percentage of households that own their own home. The homeownership rate reflects not only the availability and cost of housing, but also the preferences, expectations, and financial conditions of potential buyers.

According to the Census Bureau, the homeownership rate was 65.4% in the third quarter of 2023, which was slightly lower than the 65.8% in the third quarter of 2022.

The homeownership rate tends to increase with income, as higher-income households are more likely to afford and qualify for mortgages.

However, there may be other factors that affect the homeownership rate, such as demographic changes, credit availability, interest rates, tax policies, and consumer confidence.

For example, younger generations may have different preferences or face different barriers to homeownership than older generations.

The divergence between the homeownership rate and the real median income in recent years may suggest that income alone is not enough to explain the changes in homeownership.

Other factors, such as housing supply, demand, prices, affordability, credit conditions, preferences, and expectations may also play a role.

Moreover, the impact of the COVID-19 pandemic on the housing market and the economy may have created some temporary or permanent shifts in both variables.

On the other hand, the pandemic may have increased the demand for housing and food, leading to higher prices for shelter and food at home.

Another possible explanation for the different inflation rates across categories is the effect of government policies and interventions on prices and wages.

For example, the federal minimum wage has remained unchanged at $7.25 per hour since July 2009, despite rising inflation and living costs over time.

This may have eroded the purchasing power of low-wage workers and reduced their ability to afford essential goods and services.

According to a report by the Federal Reserve Bank of St. Louis, real median income in the U.S., which is adjusted for inflation using the CPI, has increased by only about 10% from $36,000 in January 1993 to $39,600 in July 2021. However, this increase has not been evenly distributed across income groups or regions.

The report also shows that real median income has declined by about 4% since its peak of $41,300 in January 2019. This may reflect the negative impact of the pandemic and the recession on employment and earnings for many households.

The lack of increases in the federal minimum wage and the stagnation or decline of real median income may have implications for the homeownership rate in the U.S., which is the percentage of households that own their own home.

According to the U.S. Census Bureau, the homeownership rate in the U.S. was 65.4% in the second quarter of 2021, down from 66.2% in the second quarter of 2020 and 69.2% in the second quarter of 2004.

One possible reason for the decline in the homeownership rate is the rising cost of housing relative to income, which may make it harder for many households to afford buying a home or paying a mortgage.

Another possible reason is the tightening of credit standards and lending conditions, which may make it harder for many households to qualify for a loan or refinance an existing one.

As a result, more and more people may opt to rent rather than own their homes, especially in urban areas where housing prices are higher, and supply is more limited.

According to the U.S. Census Bureau, the rental vacancy rate in the U.S. was 6.5% in the second quarter of 2021, down from 6.6% in the second quarter of 2020 and 10.2% in the second quarter of 2009. This may indicate a higher demand for rental properties and a lower supply of available units.

The shift from homeownership to renting may have benefits and drawbacks for both renters and landlords.

For renters, renting may offer more flexibility, mobility, and affordability than owning a home, especially in uncertain economic times.

However, renting may also entail less stability, security, and equity than owning a home, as well as less control over housing quality and costs.

For us landlords, renting may offer more income, diversification, and tax advantages than selling a property, especially in high-demand areas.

However, renting may also entail more risk, responsibility, and regulation than selling a property, as well as more maintenance and management costs.

That’s why good property management with the help of our turnkey providers is so important.

Developing long-term relationships is the cornerstone for success as landlords and investors in this area.

The CPI can reveal different inflation rates across expenditure categories, which may reflect different supply and demand conditions and government policies and interventions in various markets.

The CPI can also be used to adjust income and wages for inflation, which can affect the purchasing power and living standards of consumers.

The lack of increases in the federal minimum wage and the stagnation or decline of real median income may have contributed to the decline in the homeownership rate and the increase in the rental vacancy rate in the U.S., which may have implications for both renters and us landlords.

The current environment has removed a lot of potential buyers of residential real estate from the equation either because prices are too high, the mortgage cost is too high, or the ability to qualify for the mortgage in the first place is very hard these days.

All three aspects lead to a frozen market where traditional sellers don’t sell rates. They want to preserve their low mortgage interest rates and monthly payments, which traditional buyers can’t buy for the reasons above. That means we, as investors, are the only “game in town.”

That’s also why some sellers, especially for properties that are new or built to rent, are willing to pay down the interest rate for our investment mortgages to make a deal more attractive.

That’s still better for them than having more and more completed properties sitting on the market with nobody able to afford to buy them.

I have seen rates as low as 4.99% and even some examples of 2.99% or even zero interest for a few years to bridge the time until rates come back to more affordable levels.

It might be painful to see very small amounts of positive cash flow, and it is hard to find properties that meet our performance criteria, but when we have them (which we do), we should recall that our strategy is long-term.

We are on the journey to the time of Freedom Point and have invested in properties to own them for many decades. Yes, we might refinance when conditions are advantageous, but the portfolio is created to generate passive income.

Investing with low or no competition in properties that perform even in these challenging times is much better than waiting until rates come down and all the pent-up demand explodes into the market.

If you want to take advantage, just get in touch. You can also sign up for our newsletter and see currently available properties to start your journey. I hope to hear from you soon.