The Death of an American Dream?
This article is part of a series of insights into what an Average American life really looks like.
Whether it’s a house with a white picket fence in the suburbs or a high-rise apartment in the heart of a vibrant city, owning property is considered part of the “American Dream” by the vast majority of Americans.
However, for many Americans, that dream has become a nightmare because of ever-increasing home prices and stagnant wages.
In a previous article from this series, we found that the median household income is $68,703. Given the high percentage of income that goes towards housing, it was perhaps unsurprising to find that many people were struggling to get on the property ladder. In fact, for households whose income matches the median (+/- $2,000), only 58% of people own the house they are living in.
Why has housing become so unaffordable?
Looking at Census data from 1960 to 2017 on home prices, rents, and household income shows us how expensive the American Dream has become. After adjusting for inflation over time, over the last 60 years the median household income increased by a mere 29%, while the median home price has increased 121% nationwide.
Over the same time period, median gross rent increased by 72%, more than twice the growth seen by adjusted incomes, making renting costlier than ever and saving for a future home more difficult.
Rising rents and increasing home prices make it harder than ever to save for a down payment and afford monthly mortgage payments. Here are the national insights worth knowing.
National Insights
- Median home prices have increased at four times the rate of household incomes since 1960, leading to imbalanced price-to-income ratios in most major metropolitan areas.
- Nationwide, rents have increased at twice the rate of household incomes since 1960, making saving for a down payment increasingly difficult.
- A healthy price-to-income ratio is 2.6 (in years), but the nationwide price-to-income ratio hasn’t been healthy since the late 1990s.
- Only 16 out of the 100 most populated cities in the United States are below a 2.6 price-to-income ratio in 2019.
Price-to-income ratio
Price-to-income ratio is the median home price divided by the median household income in an area. This is a gauge of how long it will take home buyers to save for a down payment, and whether they’ll be able to afford their monthly mortgage payments.
The general rule of thumb used by real estate agents is that you can afford a home equal to roughly 2.6 years of your household income. In the 1960s, the price-to-income ratio was 2, meaning that two years of household income was enough to purchase a house. That isn’t the case of today’s generation of aspiring homeowners.
Since the 1960s, the difference between home prices and income has nearly doubled. By 2019, the nationwide price-to-income ratio was 3.6, showing over 3.5 years of household income was necessary to purchase a house. In fact, the nationwide price-to-income ratio hasn’t been at a healthy balance since the 1990s. Homes are increasingly unaffordable, leading to unstable housing markets where demand can’t meet supply.
Only 16 out of the 100 most populated areas in the U.S. are below the healthy 2.6 price-to-income ratio. Here is a list of both the most and least affordable cities.
The above shows a concentration of the least affordable cities on the coasts, particularly in California. The least affordable city is San Jose, CA where the average household price is 9.6x the average household income!
While these numbers are concerning, taking a regional approach can help us understand what’s driving these large discrepancies between household income and home prices to determine where homeownership is realistic for the average American.
Regional Insight: The West
Alaska, Arizona, California, Colorado, Hawaii, Montana, New Mexico, Oregon, Utah, Washington, and Wyoming.
Real estate in the West is becoming unobtainable.
In 1960, the price-to-income ratio for Western states was 2.1, but by 2017 it increased to 4.9. While median home prices increased by 195% in the West, median household income only increased by 26% since the 1960s. This means the growth rate of home prices is 7.5 times more than the growth rate of household income, making the Western region the least affordable region in the U.S.
Regional Insight: The Northeast
Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, and Vermont.
In the 1960s, owning a house was affordable in the Northeast, with a price-to-income of 2.1. However, home values started to outgrow household income in the 1980s, with a price-to-income ratio of 3.7 by 1990. The price-to-income ratio reached its peak around the 2008 financial crisis with 4.6 and dropped to 4.0 in 2017.
However, the growth rate of home prices is 4.2 times more than the growth rate of household income, making the Northeast the second least affordable region.
Regional Insight: The South
Alabama, Arkansas, Delaware, D.C., Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, Virginia, and West Virginia.
Compared to the Western and Northeastern regions, the South does not show as much of a discrepancy between home prices and household income.
From 1960 to 2000, price-to-income ratios were around 2.6, making homeownership attainable during these years. Home prices jumped during the 2000s and kept steam through the housing crisis.
Regional Insight: The Midwest
Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, and Wisconsin.
The Midwest represents the only remaining region in the US where the median borrower doesn’t need to suffer a serious financial burden. Even in 2017, the overall price-to-income ratio in the Midwest was 2.9, relative to a ratio of 4.2 averaged across the other three regions. Looking at the growth rate over time, we find that while median home prices increased by 82% in the Midwest since the 1960s, median household income increased by 29% since the 1960s.
Conclusion
For the Average American, homeownership may now be completely out of reach, with sky-high rents making it impossible to ever save for a large down payment. The only thing they can cling on to is that there are still many inland states where homeownership remains affordable.
Author’s Note: Living in Brooklyn, I took a specific look at New York City. The price-to-income ratio is currently around 5.8 with median home prices which have increased by 184% since the 1960s, compared to a 54% increase in median household income. The affordability gap was largest around 2008 and has actually shrunk over the last decade. Home prices decreased by 24% between 2010 and 2017, whereas household income increased by 12%.