The peak of the most recent financial crisis was March 2009. We’re now over a decade out, and while the economy has largely recovered, housing has not. The stock market is up. Unemployment is below 4%. -2.5% to nearly 3% 64%, below its historical average down significantly While the dream of homeownership remains strong in the U.S., it seems more challenging than ever to afford a home.
So, why can’t homeownership recover in America? The reason is what I like to call the housing dilemma.
The improvement in the employment rate has led to greater demand for homeownership. However, tighter mortgage underwriting requirements and low personal savings mean Americans can only afford lower-price-point homes. It is nearly impossible for a new home builder to profitably build a low-price-point home, so much of the demand is flocking to existing affordable housing inventory. The increase in demand for existing affordable homes drives up the prices of these homes even more.
This is a bit of a conundrum, as the cycle clearly builds on itself. As Americans increasingly chase after lower-price-point homes, prices in this band continue to rise, which means even fewer people can afford to access homeownership. Within this cycle there are two main issues: affordability and accessibility.
The first point is an affordability issue. New-build home prices increased from a recession low of $205,000 to $305,000 today. Given the cost of labor, materials and regulatory, it is nearly impossible to profitably build a home for less than approximately $280,000 (although manufactured homes are addressing this). So consumers turn to buying used or existing homes, which drives up demand (and price) for the subset of affordable homes. As a result, existing home sale prices increased from a recession low of $150,000 up to $230,000 today The takeaway is: We’re supply-constrained on affordable homes.
You might be thinking to yourself, “Why don’t we just buy more expensive homes?”
Good question — and that’s where accessibility comes in. Since 2009, government sponsored enterprises (GSEs) have tightened mortgage underwriting standards, for seemingly good and obvious reasons. As you may know, there are three main factors for getting a mortgage: FICO score, debt-to-income ratio and down payment. If you want to get a mortgage, you can’t be bottom of the barrel on all three of these: You can’t have a low FICO score, high debt-to-income ratio and low down payment. Therefore, if you have a lower-than-average FICO score, you generally need to put more money down to get a mortgage. More money down as a percent generally means you are buying a smaller home with a lower price point.
Another accessibility issue comes from rising home prices. As home prices rise, the absolute dollars you need to put down on a home also increases. A 20% down payment on a new build at $340,000 is $68,000. The median bank account in the U.S. has $4,500 in total savings (across any financial asset, this increases to $23,500, but varies significantly by age). This is why the down payment is the main issue holding many renters back from becoming homeowners.
This suggests that the housing dilemma is currently at a stalemate. Supply-and-demand dynamics are not poised to change, and thus the affordability issue will persist. The housing market is bruised, and the average American is locked out of access to homeownership.
However, with challenge comes opportunity. The housing dilemma has allowed for various innovations to tackle the housing industry. Innovations have been fairly varied, from manufactured housing startups to down payment assistance to new models around gradual homeownership. Companies like Unison and Landed offer down payment assistance programs. Blokable and Module are creating prefab homes that allow buyers to enter the housing market at a lower price point. I founded Divvy Homes to allow renters to slowly build equity savings in their homes, and eventually buy the homes back from us when ready, resulting in a down payment savings plan that gradually ramps renters into homeownership.
The truth is, real estate is a gigantic industry, and likely one startup won’t solve the housing dilemma for everyone. For perspective, with the value of the U.S. housing market at $27 trillion, even if a real estate startup grew to be the size of Google, it would still only be about 2% of the market. On the optimistic side, this reminds me of how big the opportunity is. On the other hand, it also suggests that innovation will likely start around the fringe (i.e., not competing directly with mortgages), and it will take persistence to see a widespread impact.
While there is no silver bullet to this crisis, working in the industry day to day has made it painfully evident how much the average American is struggling with access to homeownership. Going forward, I believe the way we purchase homes needs to diversify away from conventional mortgages and toward more flexible and innovative housing structures. While this may not completely fix the housing dilemma, it could start to chip away at it.