Something that every person comes to know, often as early as age 5, is that there is a special bond between humans and land. We feel it — how our home is a special place. We see it — how our parents take care of the home. We hear it — how our parents wish they had a bigger home. Our generation though — we millennials wish we could even afford a home.
Real estate is not a fair game. It never has been, and it has only gotten worse over time. The Case-Shiller U.S. National Home Price Index tracks the increase in purchase price of homes year-over-year and is currently sitting at the highest level in history. The median home price has increased ~8x vs. that of our parents’ generation, and wage growth has been unable to keep up.
In the chart below, you can see just how bad it has gotten for the average American.
Let that chart sink in…the median home price is 7x higher than the median yearly income. Seven years of income saved, assuming you spend none of it — no taxes, no expenses. In short, real estate is more unaffordable today than it has ever been in history.
You may be asking yourself, how did we get here? Our forefathers came to America, the land of opportunity, with the goal of achieving the American dream. The American dream symbolized that regardless of background or societal status, you could achieve success and climb the social ladder if you worked hard enough. That dream included owning your own home and raising a family in it. Sadly, that version of the American dream seems to be a fleeting past time with every passing year.
There are two main reasons to blame for the snowballing increase in real estate prices.
- Low interest Rates
- Lack of Housing Supply
Let’s explore how both of these have affected real estate prices over the years.
An Era of Low Interest Rates
Ever since the financial crises of ’08, interest rates have been at historic lows ranging from .5% – 2.5%. Low interest rates allow individuals to borrow money very cheaply. For example, on a $100,000 loan, an individual would only need to pay $500 – $2,500 in interest each year. Real estate is unique in that it is one of the only asset classes that allows individuals to finance a home purchase with a loan to value ratio of 80%. Meaning that 80% of the property’s value is financed through debt and repaid over a 30-year period. With that understanding, it’s easy to see how an era of historically low interest rates has led to ever increasing home valuations. Real estate tends to be one of the first places people invest their money. This normally wouldn’t be an issue if housing supply would follow in tandem; unfortunately, in many big cities it hasn’t. In fact, lack of housing is cited as one of the main culprits for such high increases in real estate prices.
A Lack of Housing Supply
A lack of housing supply wasn’t always an issue. There was a long period of time in which construction of new houses closely followed suit with population growth. From 1968 through 2008, about 1.53 million houses were constructed each year, according to U.S. Census Bureau data. During that period, homebuilders constructed enough homes to keep supply and demand relatively balanced. However, after a few years of overbuilding in the early 2000s, the bubble burst and the financial crisis hit.
Since then, an average of only 936,000 new homes have been completed each year from 2009 through 2021 — 39% less per year since pre-financial crises. Meaning, the housing market supply never fully recovered to the levels seen for decades leading up to 2008.
In 2021, economists at mortgage guarantor Freddie Mac estimated that the U.S. is short 3.8 million homes. They noted. in particular, the under-supply of starter homes — those 1,400 square feet or less.
“In 2020, we estimate that there were only 65,000 new entry-level homes completed — less than one-fifth of the entry-level homes constructed per year in the late 1970s and early 1980s,” the report said.
The pandemic further exacerbated the situation as home building materials became harder to get and more costly. For example, Lumber prices increased more than 150%.
We are now a few years into the start of the pandemic – what does the future of real estate prices look like?
The Future of Real Estate Prices
It’s currently May 2022 and we are in an interesting time. Interest rates have been steadily increasing (5.42% for a 30-year mortgage), stocks have pulled back 30% — 70% from their 2021 highs and inflation hit an all-time high of 8.5% in March 2022. While rising interest rates should typically lead to a pullback in real estate prices, we’ve seen home prices in big cities continue to hit all time high month after month. For example, sales of homes in New York City in just Q1 of 2022 is up 45.9% YoY according to Miller Samuel and Douglas Elliman report. That increase in sales was up 48.9% from pre-pandemic levels, marking the third consecutive quarter of record high sales.
Of course, these record high sales could be because real estate is typically a lagging indicator to overall market sentiment. However, what’s more likely the case is that real estate is seen as a hedge against rising inflation. That coupled with the fact that housing supply is still an issue in big cities results in real estate prices not being forecasted to pull back anytime soon. Even with the markets crashing, the average American pulls further away from achieving the American dream of home ownership with each passing year.
It doesn’t have to be this way. While it’s true that real estate prices will likely continue to increase — Americans from all backgrounds should have the opportunity to invest in real estate and get access to this stable appreciating asset. This fundamental belief was the reason behind starting Homebase. Our goal is to democratize access to real estate investing by fractionalizing real estate via NFTs. In this way, people can truly feel like owners. By holding the NFT, you would be entitled to receiving your proportional amount of monthly rent, and any future appreciation of the home.
While we realize that we can’t stop rising prices in real estate without government intervention, what we can do is give everyone the opportunity to feel like a homeowner.
Domingo, Homebase Co-founder
