America’s housing affordability has severely deteriorated over the last two years. Mortgage rates reached a 23-year high last October 2023, and the limited supply of homes for sale has kept a floor under home prices. Home sales in September dropped to their lowest levels since the foreclosure crisis.
Roughly 85% of American homeowners are locked into lower interest rates from past years, and many have experienced rising home equity values, with the median home price up 2.8% over last year. This is a contributing factor to why the overall U.S. consumer is still fairly healthy, but also why the housing market is all but frozen.
To make the most of this competitive market, first learn the factors at play causing the crisis and then take stock of the opportunities at your feet: fix-and-flips, rentals, and re-fis.
Housing affordability is a shared problem that is getting worse across the country.
Housing affordability is a shared problem that is getting worse across the country: 80 percent of Americans living in rural communities believe housing affordability is getting worse in their community, while 72 percent of residents in urban areas feel the same. This sense is shared across all demographics, regardless of partisan identification, race, age, gender, education, or whether you own or rent your home.
What’s driving the affordable housing crisis?
The latest research on the 2023 affordable housing crisis by the National Homebuilders Association shows that 64.5M out of 123.5M total American households are able to afford a $250K home. Another 39M can afford a $150K property. The kicker is that the median price of a new single-family home is just over $425K, a price out of reach for 73% of households in the US. Add in the high cost of land, lumber, materials and manufacturing issues still rippling forward from 2020, and you begin to understand why the gap between what US households can afford and what builders can deliver is, in fact, a crisis.
Likewise, high interest rates are keeping families from moving out of their starter homes. Just five years ago, a couple could buy a starter home for $250-$300K, live in it for a year or two while they raised some money for a down payment on a bigger house, maybe worth $450K. But the fed keeps hiking up interest rates, which means mortgage lenders are hiking theirs too, which means the average US homeowner can’t afford the bigger, more expensive house. They’re staying put.
So the supply of available homes available is tightening while the demand has remained the same or increased. Inventory is tight.
Key Factors Driving the Crisis
Rising Home Prices
- The median home price in the U.S. has surged due to limited housing supply and increased demand.
- Builders haven’t kept pace with population growth, leading to inventory shortages.
Higher Mortgage Rates
- Interest rates have climbed from record lows in 2020-2021, increasing monthly mortgage payments.
- A buyer who could afford a $400,000 home at a 3% interest rate may now only afford a $300,000 home at today’s rates.
Stagnant Wage Growth
- While home prices have increased by double-digit percentages, wages haven’t kept up.
- Many buyers are now spending a higher percentage of their income on housing, making affordability a major concern.
Increased Demand for Affordable Housing
- With fewer buyers able to afford mid-range or high-end homes, competition for affordable properties has skyrocketed.
- This has led to bidding wars even on entry-level homes, pricing out many first-time buyers.
Smart investors head into the storm
For real estate investors, the COVID-19 pandemic was like jumping into an ice bath. The government shut down. Wall Street-backed lenders closed up shop (we didn’t!), as did many investors. We counseled our investors to stay the course and, like the brave buffalo, charge on through the storm. And those that listened and invested throughout the pandemic enjoyed healthy margins.
Today’s market is less like an ice bath and more like slowly rising waters. Investors aren’t panicking, but it still seems “safe” to sit on the sidelines while interest rates rise and inventory is hard to come by. But much the same as sitting out the returns of 2020, putting your investment business on pause during this period of time is a big mistake, because deals are still getting done. Good buys on affordable houses do exist—you just have to find them and avoid overspending on repairs and updates.
Be tenacious and jump in with both feet on a good deal because once you rehab, you’ll likely have multiple buyers bidding up the sales price on your exit, resulting in a high profit for you. Affordable housing is always a good investment. Right now, it’s a little harder to find, but the payoff is worth the struggle.
JCREIG Capital Funding
Using hard money loans allows real estate investors to maximize leverage when purchasing a property and close within just a few days, all while freeing up their own cash for other uses.
Single family rentals are still hot
Today, the average household rent an American can afford is about $2,500 to $3,000 a month. The golden rule at Residential Capital Partners is for a rental property to be able to generate 1% of the value of the house per month in rent to cover all costs associated with the property (maintenance, repairs, taxes, utilities, financing, etc.).
Today’s purchase, tomorrow’s refi
What goes up must come down. There’s a silver lining to this current cloud of high interest rates; if you buy properties at a higher interest rate today with good cashflow, after you refinance in a year or two, that cashflow will be even better. The sun will come out tomorrow and when it does, you could be looking at a windfall of refinance proceeds.
Example: You financed a property for $200K and invested $25K from the down payment and payments towards your long-term loan. Interest rates lower from 8% to 6%. Now you can finance all of your equity out (and maybe another $25K) at a lower rate of interest. Now, your cashflow is even better. Better yield, more mailbox money, and your housing stock increased from 4% to 8%.
Your next property is out there. Go find it.
The affordable housing crisis in America is holding open the door of opportunity for investors. It’s still a great time to flip or rent an affordable home in America.
So keep your nose to the ground and always remember to run into the storm. There’s a pot of gold at the end of this rainbow.
JCREIG Capital Funding
Looking to finance your next investment project?
JCREIG Capital Funding is a hard money lender that can help you fund your loan.
We have over a decade of experience, and have funded hundreds of millions of dollars in private money loans for commercial and residential real estate projects across The Sunshine State.
Reach out to us @ 561-303-0334 if you require funding or have any questions.
FAQs
Because of their sheer size and deep pockets, institutional real estate investors can have a massive impact on home inventory on both a local and national scale. This is particularly true in growth areas, where companies can swoop in and get what practically amounts to a “bulk deal” on inexpensive houses. While that may be good for business, it’s bad for hopeful homeowners: The number of homes these companies are able to purchase can greatly reduce the available supply in a given area, especially for affordable starter homes, making it even harder for regular buyers to buy a house and compete.
There is still hope for house hunters, though. Even if you live in a market where real estate investors have taken up a lot of the inventory, here are a few things you can do to improve your chances of buying a home.
- Sweeten your offer
- Go light on contingencies
- Expand your horizons
- Reconsider your needs
The housing affordability crisis isn’t just a problem for buyers—it directly impacts how real estate agents do business. As affordability declines, agents are seeing shifts in buyer behavior, longer sales cycles, and increased competition for lower-priced homes. Here’s what that means for you.
Single-family homes are the most popular choice for real estate investors; nearly three in five (58%) of those surveyed specialize in these properties. However, in many cases, the homes that investors purchase aren’t necessarily ones that would attract homebuyers — at least, not initially.
For instance, 67% of investors would consider properties with squatters, while 65% would buy those with foundation issues. About six in 10 investors would buy a home in an area with a high risk of natural disasters like floods and hurricanes.
These are generally properties at the lowest end of the market, which investors can flip and sell for a profit. In many cases, such properties wouldn’t go on the market at all or would instead be a quick sell-by-owner.
In contrast, homebuyers commonly think in the long term and tend to look for turnkey properties.
To turn a profit, real estate investors must be selective. Just 39% of those surveyed won’t touch property in an undesirable location, while 26% stay away from properties covered by a homeowners’ association (HOA) — about one-third of U.S. homes. Many HOAs restrict rentals and enforce strict home design and maintenance policies.
Investors tend to look at homes at the lower end of the market. Clever says 56% of house flippers look for homes selling for $500,000 or less. Moffitt believes the actual number may be even lower — around $350,000 or less. As a result, first-time and low-income homebuyers feel the brunt of the competition.
