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According To Studies, Home Prices Are Rising Faster Than Incomes

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For likely home buyers, depending on how much of a salary they bring in, they may have to wait a bit longer before landing that perfect house.

According to Real Estate Witch, from 2019 to 2021, the average house-price-to-income ratio increased from 4.7 to 5.4, a 14.9% jump and more than double the recommended ratio of 2.6 — which means houses now cost 5.4x what an average person brings in yearly.

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However, home prices rising faster than the average individual’s income isn’t suddenly a new trend. Since 1965, home prices have risen higher than the median income at a rate of 7.6x , and 3.1x faster since 2008. From 2008 to 2021, home values have increased by 25%.

Real Estate Witch also found that from 1965 onward, median home prices have gone from $171,942 to $374,900 — an 118% increase — while the median household income just barely rose up from $59,920 to $69,178, a 15% increase. Even worse, 2020 saw a 2.9% decrease in average income from $69,178 to $67,521, the first statistical decline in income since 2011.

In order to afford a home in today’s real estate landscape, homeowners need an average income of $144,192, which clocks in around $75,014 higher than the current average household income. CNBC notes that a general rule of thumb when buying a house is that the price should be no more than 30% of your gross monthly income – something that’s becoming increasingly difficult to do.

While this problem affects all classes and buyers, according to Bloomberg, those getting hit the hardest by the ever-increasing prices and overall lack of home flexibility are low-wage service workers and the blue-collar service class.

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There are a number of factors when it comes to the fluctuation of home prices. Local incomes play a big part, but so do shortages in supply and movements in mortgage rates. The economy, interest rates, and COVID-19 pandemic also affect median home prices.

According to real estate research firm CoreLogic’s chief economist, Frank Nothaft, the latest change in home price growth was one that hadn’t been seen by the company’s index in the four decades its been running.

“Annual home price growth was the most that we have ever seen in the 45-year history of the CoreLogic Home Price Index. This price gain has far exceeded income growth and eroded affordability.”

Most industry experts, meanwhile, believe that while the growth of home prices will slow, they won’t stop altogether or decrease. Fortune went over a number of real estate companies’ predictions, which see a home price growth of anywhere from 4% to 13.6% — or $389,896 to $425,886 — occurring in 2022. While the ranges of growth are clearly uncertain, the acceleration isn’t.

However, some other groups think the forecast may not all be cloudy. According to the Mortgage Bankers Association, the prices of homes should drop as 2022 progresses, although the first quarter will see the median price of existing homes possess a 15.3% year-over-year gain to $362,000. By the end of 2022, the forecast calls for a 2.5% decrease in year-over-year home prices.

While Fortune does admit MBA’s decreasing prediction is an outlier, the number can still give hope to home buyers that purchasing a new house could become easier in the next 12 months, if only just a little bit.

Flag USA

Report Suggests Upward Mobility Easier in Canada Than in U.S.

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One of the central themes of the American mythology is the concept of the “American Dream,” which says that in America, no matter your background, if you work hard you can achieve success and upward social mobility. The American Dream is rooted in ideals of democracy, individual rights, and equal opportunity that can be found in the country’s founding documents, including the Declaration of Independence and the Constitution. However, a new report has found that in the United States, having wealthy parents is a better predictor of a person’s chances of success than how much they work. 

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The report, called the World Economic Forum’s Global Social Mobility Index, ranked 82 countries according to their citizens’ capacity to realise their potential irrespective of their socioeconomic background. The report looked at five different dimensions of nations’ economies: health, education, access to technology, work, and protection of institutions. The Nordic countries, including Denmark, Finland, Norway, Sweden, and Iceland, ranked nearest the top of the list, whereas France, Canada, Japan, and the United Kingdom all ranked ahead of the United States, which was listed in 27th place. Closer to the bottom of the list are Russia, China, Brazil, India, and South Africa; some of these countries are known for human rights violations and authoritarian regimes, which undoubtedly contribute to their lack of opportunity for upward social mobility.

The countries that provide the highest opportunity for upward social mobility are the same countries that offer their citizens access to high-quality public education, opportunities to work in good conditions, and social safety nets. In Denmark, for instance, a child who is born into poverty has a similar chance of success in life, measured by high income, as a child born with wealthy parents. In the United States, on the other hand, unfair wages and weak social safety nets makes it substantially more difficult for the children of poor parents to move up in society. In fact, the report found that in the United States, it takes five generations for a low-income family to reach median income.

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In addition to diagnosing the problems of each country in connection with obstacles to social mobility, the report also recommends solutions for each country to engage in in order to address these deficiencies. Among the recommendations are more progressive and balanced income tax structures to prevent wealth from being concentrated in the hands of the very few and to provide funding for social safety nets. The report also advises businesses to pay more fair wages and invest in allowing their employees to develop skills that can enhance their productivity. According to Klaus Scwhab, the founder and executive chairman of the World Economic Forum, “the response by business and government must include a concerted effort to create new pathways to socioeconomic mobility, ensuring everyone has fair opportunities for success.” 

Real Estate Investing

The Pros and Cons of Investing in Real Estate

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Investments are a smart way to expand your wealth, as the returns on long-term investments can be substantial. However, when considering how to invest your money, it’s important to take into account various options. While investing in the stock market is common and relatively safe, it may be a better choice in some cases to invest in real estate instead. Buying land as an investment is fundamentally different from investing in stocks, and as such, before you make a decision, it’s best to consider how these differences are likely to impact your returns.

According to Andres Pira, the CEO of Blue Horizons Developments, there are many advantages to investing in real estate. When buying property instead of stocks, you have more control over your profits. Investing in the stock market requires buying stocks when they are low and selling them when they are high, and it can be difficult or sometimes impossible to predict how the stock market will behave. Real estate, on the other hand, is more fixed, as variables like size, location, and features remain in the buyer’s control. Additionally, when selling real estate, you have the power to negotiate your price depending on who you’re selling to, which you cannot do with stocks.

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Another advantage of real estate investments is found in their consistency. If you’re a landlord, you can expect a consistent cash flow in the form of regular monthly payments from your tenants. Generally, as time goes on, the cost of rent increases to match inflation, meaning that if you’re a landlord, you can expect monthly payments to increase with time. While the stock market offers the potential for an unexpectedly high payout, it carries with it a risk of losing a substantial amount of money, given the difficulty of predicting economic changes.

Investing in real estate is also unique in the sense that it enables certain tax advantages. For instance, real estate owners can take advantage of a depreciation expense, which allows them to save money on their taxes significantly and use those savings to reinvest, pay back loans, and more. Real estate can be a tricky market to invest in, however, and investors need to be careful about the property they choose to buy by putting substantial time and effort into research and other due diligence.

There are also a number of disadvantages to real estate investments. For one, property is very expensive; while you can invest in the stock market with a relatively small amount of money and still expect moderate returns on your investment in due time, properties that are worth investing in require a substantial down payment and other upfront costs such as improvements and repairs, as well as ongoing payments like property taxes, insurance, and more. 

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And while investing in the stock market can be as easy as signing up for an app, real estate investments take a substantial amount of your time, particularly if you’re new to the business, as there is a lot to learn when managing real estate investments, during which time mistakes can be very costly.

If you want to invest in real estate, you can be expected to be in it for the long haul, as the best way to invest in real estate involves taking advantage of a long-term strategy for maximizing profits. And while being a landlord seems to be an easy way to generate passive income, tenants can cause any number of problems, and sometimes even sue their landlords over disagreements about their living situation. To make matters worse, the law in many jurisdictions tends to favor tenants over landlords, as a tenant’s right to a suitable living environment is weighted against a landlord’s right to make money off their investment. For these reasons and more, it is essential to exercise good judgment and care when expanding your investment portfolio to include real estate, but managing properties successfully can be very profitable.

Income Inequality

The Cultural Impact of Income Inequality

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Over the past several decades, as tax cuts and other economic policies have benefited wealthy Americans at the expense of lower and middle-class Americans, the gap between the wealthy and the poor has continued to widen. A number of factors account for this; not only have wages remained virtually stagnant since the 1970s despite accelerating economic growth overall, but the cost of living has also increased, as have expenses for education and health care. This radical transformation in the country’s economic landscape has not only had effects on the financial world, but on the broader cultural environment that informs human behavior in society. Nearly every aspect of life is affected, from entertainment to politics to our shared system of fundamental values. 

Perhaps the most striking example of the broader impacts of income inequality is the fact that rich people live longer lives than poor people. For some groups of disadvantaged people, life expectancy is shorter than it was for their parents, pointing to the extreme effects of these people’s inability to earn as much as their parents did. A number of factors account for this difference in life expectancy; one possible explanation is racism in the healthcare industry, as minorities are both likely to receive less in wages and face discrimination in hospitals and doctor’s offices. Another factor is the fact that people are not able to retire as young as they used to be able to; many workers continue their jobs into their 60’s and 70’s, opening them up to stress and work-related health complications in old age. Additionally, as healthcare costs increase, many lower-income individuals may delay or opt out of doctors’ visits over financial concerns, leading to exacerbated illnesses and early death.

The type of work people engage in, too, is shaped by income inequality. While human societies have virtually always been divided by class, with lower classes working in service of the upper classes, the widening income gap between the classes has led to an explosion of service-related jobs, such as manicure and massage therapy. These types of jobs often employ immigrants and workers who did not receive a college degree, and are characterized by low pay and poor working conditions. Nail salons in particular are plagued by poor and illegal working conditions, leading to a statewide investigation by New York Governor Andrew Cuomo. 

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This category of work, which many call “wealth work,” also applies to jobs like driving an Uber or delivering food. Though these jobs are beneficial to those without a college education, particularly in the aftermath of the collapse of the American manufacturing industry, they also point to a cultural shift towards more rigid definitions of class, which makes it hard for lower-class individuals to advance in their careers. What’s more, these jobs are often performed with a certain degree of anonymity, as they are performed through an app or in urban business centers far from the worker’s place of residence, in contrast with the more personal interactions between the classes of several decades ago.

The gap in income between the classes correlates with an increase in polarization in American politics; as the Right has moved further to the political right under authoritarian leader Donald Trump, the Democratic Party as a whole has moved to the left in recent years, with once-taboo leftist policy positions like a substantial raise of minimum wage, entirely socialized medicine, the cancellation of student debt, and the idea of a universal basic income becoming topics of open discussion. The wealthy class has also transformed politics through the use of substantial political donations, with Donald Trump having raised well over $100 million for his re-election campaign this year alone. Wealthy donors, including oil executives and Wall Street titans, have successfully lobbied to cut taxes on the super-rich and roll back regulations which are meant to protect customers but impose costs on large companies. On a large scale, the effects of these policy changes have been to further disenfranchise the lower and middle classes in service of the upper class, as evidenced by the rapidly declining quality-of-life of most Americans.

Millennials Buying Home

Millennials Face Difficulties Affording Homes

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For many Americans, a key part of the American Dream is the ability to save enough money to afford a home. But for millennials, many of whom are currently at a point in their lives where they’d like to move out of their parents’ house or their apartment and own a piece of real estate, a number of factors can make this dream seem to be an impossibility. According to the Urban Institute, just 37% of millennials owned homes in 2015, down eight percentage points from Gen Xers and Baby Boomers when they were a similar age. If millennials owned homes at the same rate as previous generations, there would be around 3.4 million more homeowners today. And although 9 out of 10 millennial renters would like to purchase a home, only 4.9 percent say they plan to do so in the next year, and 34 percent anticipate waiting five years or more before being able to buy real estate. Among millennials who want to own a home but are unable to do so, 3 out of 4 cite affordability as the reason, with many citing a lack of savings for a down payment and the burden of student loans as contributing factors.

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The causes for millennials’ problems affording homes are multifaceted. Whereas many Baby Boomers were able to attend public colleges and universities without having to pay for tuition, most Millennials did not have the same luxury, instead having to borrow tremendous amounts of money to pay for educational costs which, despite offering a value which has remained stagnant over the past several decades, have grown substantially faster than the rate of inflation. Because a higher percentage of millennials attended university than previous generations, the value of a college degree has diminished, as employers have a wide variety of choices for hiring well-educated candidates. And while millennials’ paychecks have roughly the same purchasing power as those of Americans living 40 years ago, the average cost of housing has more than doubled in that time. It has been estimated that, at the current rate, it will take the majority of millennials twenty years to save enough money for a down payment.

The financial burdens imposed on millennials dreaming of owning a home extend beyond stagnant wages and student loan debt. The cost of renting an apartment is substantially greater than it used to be, and because of the generation’s difficulty earning money, financial institutions are more reluctant to grant credit to millennials, with 58 percent of millennials being denied credit, compared to 35 percent of prior generations. Millennials are also less likely to own stocks than other generations were, as a result of having come of age during the Great Recession and becoming skeptical of the stock market as a result, causing many millennials to miss out on some of the major benefits of the recent economic boom. As a result of these economic problems, some forecasters predict that real estate agents will have difficulty selling houses in the future, as millennials replace Baby Boomers as the country’s largest generation.

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Other factors discouraging millennials from homeownership are also at play. Millennials are the most racially diverse of any current American generation, and homeownership is more valued culturally among caucasians. Additionally, millennials are waiting longer than their parents and grandparents to get married and have children, as the marriage rate among young people has dropped from 52 percent in 1990 to 39 percent in 2015, delaying the urgency of owning a home. Also, millennials tend to prefer to live in cities more so than prior generations, where the cost of living is higher and purchasing a house is out of the question. As a result of economic changes over the past several decades, the demographic among millennials most likely to own a home are those who can earn more due to having a college education and come from a wealthy background, as they can borrow money from their parents to supplement the cost of a down payment. As houses are frequently the most valuable financial assets Americans own, not owning a house has a negative impact in a person’s overall ability to accumulate wealth over time. Additionally, intergenerational transfer of homes is likely to increase wealth disparity between races of millennials, as minorities are less likely to own and be able to inherit homes.

Though these prospects seem grim, a number of solutions have been proposed to help with the problem of home affordability among the younger generation. One proposed solution is to invest in programs teaching young people about the finances of homeownership, encouraging people to start saving up for a home from a younger age and increasing awareness of programs designed to help people afford homes. Another proposal is to update the criteria that creditors use to evaluate millennials’ suitability for loans, taking into account their rental, telecom, and utility payments. In any case, whether you’re interested in buying a home soon or not, it’s always a good idea to make sure you’re keeping good track of your finances and have a smart, realistic plan for your future.