America's housing affordability crisis spreads to heartland

Boston

LOW mortgage rates and thriving employment should be the recipe for a strong housing market. Instead, they're deepening America's affordability crisis.

What began on the coasts, in areas like New York and San Francisco, is now radiating into the nation's heartland, as well as to cities from Las Vegas to Charleston, South Carolina. Entry-level buyers are scrambling to purchase homes that are in short supply, sending values soaring.

Expectations that the Federal Reserve will reduce interest rates this week will do little to change the sober reality: For many, prices have risen much faster than incomes, pushing homeownership out of reach for a new generation of hopeful buyers. That's cooling the market, with the 2019 spring season shaping up as the slowest for sales in five years, according to CoreLogic Inc.

"All signs point to a housing market that should be doing really well and it's not," said Danielle Hale, chief economist for Realtor.com. "The No 1 constraint, despite low mortgage rates, is that people can't find housing that they feel is affordable."

Dean Rusch, a 29-year-old chemical-plant worker, has been trying to buy a starter home for less than US$200,000 in Louisville, Kentucky, since April. On three occasions, houses he planned to tour were snapped up before he could get there. He was outbid on another. He finally had an above-asking offer accepted on a house listed for about US$199,000, but only after his agent locked the door during a showing, keeping another buyer out. For much of his hunt, it was slim pickings.

"I've looked at some crappy ones," Mr Rusch said. "I used to be in the fire department, and smelled some crazy stuff. But one smelled so horrible that it gave me a headache."

Recent months have shown a growing divergence between the high and low ends of the US market. Prices in the bottom third jumped about 9 per cent in June from a year earlier, compared with 1.1 per cent growth for the top third, data from Redfin shows. Meanwhile, sales for lower-priced homes plunged almost 20 per cent as buyers struggled to find properties in their range, according to Zillow.

There are some signs of a pick-up in the market. Contracts to buy previously owned homes rose 2.8 per cent in June from the previous month, exceeding economists' forecasts, the National Association of Realtors reported on Tuesday.

Still, the outlook is particularly bleak for first-time buyers. The number of new homeowners created in the second quarter was the lowest since 2006, and just a third as many as a year earlier, the Census Bureau reported last week. Black homeownership fell to the lowest level since at least 1970.

Unequal recovery

The housing recovery that began in 2012 has been unequal from the start. About six million Americans lost homes in last decade's crash and needed time to rebuild their credit. Private equity firms such as Blackstone Group Inc. swept in to buy foreclosed properties at deep discounts and rented them back to many of those displaced former homeowners.

Now those people are back in the market, along with the bulging population of millennials eager for their first crack at homeownership. But many of the properties they want have already been picked over.

Affordable homes disappeared first in technology and financial hubs like Silicon Valley and New York, where buyers with big paycheques pushed up prices. Now values are flattening after many would-be homeowners have been forced to the sidelines.

In some areas, demand has also been hit by a pullback in foreign buyers and new federal limits on property-tax deductions, as well as fears that a recession may be around the corner.

In Louisville, fewer than one-fifth of listings were affordable to buyers in the bottom 30 per cent of incomes in April, according to Realtor.com, down from 23 per cent a year earlier. The trends are similar in other low-cost cities from Grand Rapids, Michigan, to Charleston, where only 6 per cent of listings meet that affordability threshold.

Clogged up

Las Vegas, which was hit hard by the last crash and then sharply rebounded, now is seeing a rapid decline in sales because there's little on the low end worth buying. Many single-family houses were purchased by investors, and now are rentals, so there aren't enough owners of entry-level homes to move up to the next rung of the ladder, said Thomas Blanchard, president-elect of the Greater Las Vegas Association of Realtors.

"Our inventory is clogged up, causing a back-up of people that want to buy," he said. "It's a self-fulfilling prophecy - nobody is willing to move anywhere because they're afraid they won't find a house to buy."

Mike Manesiotis, a 28-year-old who works in software sales in Charleston, wants to live in or near downtown, within a short walk or Uber ride to bars and restaurants, and pay less than US$350,000 - near the median price for a single-family home in the city. But he hasn't found anything he likes. The return of low mortgage rates hasn't helped.

"It's not the interest rate; it's the sheer cost," he said. "You're spending US$300,000 on a home that's 1,000 square feet. You get two bedrooms, one bath and it needs a lot of work." BLOOMBERG