With interest rates rising to combat stubbornly high inflation, rising mortgage costs are making housing in the US – as well as across the Atlantic in the UK – less expensive. In America, a 7 percent rate today for a 30-year mortgage, combined with an average home price of $390,000, results in a monthly mortgage payment of $2,600; A massive 53 percent increase since last December, when rates and prices were lower. The Affordability of housingwhich is a function of home prices and personal income as well as interest rates, has become a hot political issue ahead of the midterm elections.
And while wages have been rising as the pandemic has subsided, they have failed to offset the rising costs of energy, housing and food. Despite growing expectations of lower house prices, with higher prices, affordability is still expected to be a long-term challenge, Especially for first time buyers and youth.
Some of the factors behind rising real estate values ​​are common throughout the United States and other developed economies. Low interest rates helped increase demand and prices, but in many places this resulted in restricted land supply, zoning issues, and over-regulated markets. The result is that even before last year’s hyperinflation, average home prices in 10 countries that account for 60 percent of global GDP had tripled in the past two decades, according to the McKinsey Global Institute Numbers.
In the US, this is fueling political disillusionment, as younger buyers who can’t find starter homes they can afford are pushed into rental properties, where prices are also rising. For them, the broken market that prevents them from making their way up the housing ladder is a key indicator of a broken American dream of living a better life than the previous generation.
Republicans trying to blame President Joe Biden to cut affordability. But the president has nothing to do with underlying factors, such as monetary policy, supply chain disruptions, the pandemic-related housing boom (as buyers have moved from rich cities to less densely populated areas, driving up prices in new places), and strict local zoning rules that make It is difficult to build new housing in the most popular areas.
The battle of “Nimby-ism” or “not in my backyard” by current homeowners to maintain the narrow zoning so that their property does not depreciate, (or in some cases to try to keep neighborhoods racially homogeneous), has become a rallying cry for housing reform. Freddie Mac estimates that the United States is short of 3.8 million housing units, which will require more construction. But rising land and construction costs and strict local rules make it difficult to build new units, especially the cheaper ones. Fewer homes were built in the United States in the decade after the 2008 financial crisis than in any decade since the 1960s.
What should be done? Both the federal and local government should get rid of outdated zoning laws, some of which are over 100 years old, and use the post-pandemic moment to rethink how urban areas operate — encouraging density, but also diversity. Cities do best when they offer a good mix of office and residential space, smaller units, and larger homes, as well as multi-family dwellings. There are lessons here outside the United States.
The government may also need to offer tax credits to low- and middle-income families, and incentives to builders to build smaller, higher-quality homes. There must also be limits to how much of the market can be controlled by large investors: with private equity entering one family, and now, prices in many markets have risen. Housing is an asset, but also a necessity. Neither families nor politics will be stable until affordability improves again.