MNI ANALYSIS: US Housing Prices Outpace Savings

     WASHINGTON (MNI) - An inventory shortage in housing has propelled an

affordability issue in both the housing and rental market, as discussed in last

week's MNI Analysis: Affordability Concerns In US Housing, and as consumers'

cost of living mounts there is a growing threat of a lack of savings dampening

future home buying and emerging risks in borrowing.

     Both the median new and existing home prices have been steadily rising

since 2011. Since September 2013, new home prices have been consistently higher

than prices seen during the housing bubble, while existing home prices have now

stayed above the pre-recession highs since April 2016. 

     As home prices go up, the required down payment rises proportionally -

placing a larger initial burden on home buyers.

--CONSUMERS PUTTING LESS DOWN

     While some non-homeowners' have a misconception that 20% down is still the

prerequisite for home ownership, the percentage that most buyers put down is

considerably smaller. A 2017 study by the National Association of Realtors,

entitled the Aspiring Home Buyers Profile, shows that the median down payment

was just 10% of the home price. In fact, 61% of first-time home buyers put down

6% or less, according to the NAR study.

     Though the availability of mortgages despite lower savings can initially

seem an encouraging sign for the housing market, it is endemic of a larger

issue: home buyers cannot afford to save up enough for what was once considered

a necessary signal of meeting future payment responsibilities. 

     As of the March new and existing home sales reports, the median home price

is $337,200 and $250,400, respectively. If consumers were still putting down 20%

as a downpayment, this would translate to $67,440 and $50,080, respectively.

Instead at 10%, the median home buyer is putting down $33,720 or $25,040 -

depending on their choice to buy a new or existing home. 

--SAVINGS FALLING SHORT

     Even at these reduced percentages, downpayments remain well above many

Americans' savings. Analysis of the most recent Federal Reserve Survey of

Consumer Finances report shows that the median savings account in the US is

around $5,000, well below even the 10% median downpayment. With these relatively

low savings levels, potential home buyers are left either scrambling for other

sources of financing a downpayment or taking on bigger mortgages.

     Low savings accounts fall in line with a broader trend of dwindling

savings, as consumers continue to spend larger shares of their disposable

incomes rather than save. The personal savings rate has been trending down,

reaching a 13-year low in December. While tax reform did help to raise the

savings rate up marginally to 3.1%, it was still down sharply from 5.7% just two

years ago. 

     This is particularly problematic as the NAR's 2017 Profile of Home Buyers

and Sellers shows that the largest contributor toward meeting a downpayment

reported by home buyers is their personal savings - with sale proceeds from a

previous residence following at a distant second. 

--HOME OWNERSHIP DELAYED

     A mismatch between savings and rising home prices has begun to take its

effect on the housing market, delaying many potential home buyers. The NAR's

Aspiring Home Buyers Profile 2018 shows that 36% of all non homeowners find

saving for a downpayment very difficult. 

     The perceived unaffordability of owning a home is such that only 15% of

non-homeowners would consider buying a home even when their rent increased,

according to that NAR survey. In comparison, 42% said they would renew their

lease anyway and 44% said they would seek a cheaper rental, find a roommate, or

move in with family. 

--BURDEN OF BORROWING GROWING

     The share of home buyers opting to put less down is growing as savings

continue to fall short and home prices rise. However, appetites for large

mortgages are likely to diminish in an increasingly inflationary environment. As

Fed rate hikes push mortgage interest rates higher, there could be a notable

drop off in the number of first-time buyers, who made up 34% of all home buyers

in 2017, that have come to rely on financing 94% of the home or more. 

     Additionally, as consumers continue to heavily borrow amidst rising rates,

there is a mounting threat eerily similar to the housing bubble - as home buyers

buy homes for prices that loom well above their savings.

--MNI Washington Bureau; +1 202-371-2121; email: holly.stokes@marketnews.com

[TOPICS: MAUDS$,M$U$$$]