Affordability is one of the most important aspects of the housing market in the United States explains Maxwell Drever. Before going through the housing affordability and affordable housing crisis issues, let’s know the actual definition of housing affordability.
Housing affordability is known as the capability of an individual to afford basic household expenses. In the United States, a house will be called affordable if the price of the home is less than 30% of the annual income of any individual. More than 65% of Americans purchase a house after determining the condition of the housing market. However, there is a majority of people who cannot afford these houses. Affordable housing is the only option left for them and unfortunately, the affordable housing crisis in the United States is high. Affordable housing can be anything from transition housing, emergency shelters, subsidized housing, supportive housing, and market rental housing. Here are the top 4 factors that affect housing affordability.
Interest rates play one of the biggest roles in determining the affordability of housing. Most Americans prefer taking variable mortgage rates as they don’t want to deal with the fixed rate of the mortgage. Therefore, the bank that provided the home loan will undoubtedly impact the interest rate payments of the mortgage. This is undoubtedly one of the biggest factors that would impact the affordability of houses. Mortgage payments consume more than 65% of people’s disposable income. Therefore, a small change in the interest rates of the mortgage prevents people from purchasing the house, says Maxwell Drever.
When the mortgage interest rate increased to 15%in 1992, people stopped purchasing a house through loans. At that time, the demand for housing decreased. However, the interest rates had been decrease to 0.5% in 2008. Despite this, people still need access to affordable housing due to the rising unemployment.
The population of the United States is another important factor that would impact house affordability. Not just the population, but also the demographic changes have increased the demand for houses. However, the supply is less and the Government is struggling to build more affordable homes.
The housing demand is not only dependent on population but also the size of the household. Some specific demographic and social factors are increasing the number of households. Maxwell Drever says these demographic changes are increasing divorce rates too.
Another factor that can implement on the demand for affordable housing in the United States is the willingness and support of the banks to lend mortgages. If a bank provides mortgages with a higher income profile, then the demand and supply of affordable housing will be greater. However, the support of the banks regarding the mortgage is dependent on the strength of the interbank lending sector. Due to the affordable housing crisis, many banks are not providing mortgages. Even if they do, they are charging higher interest rates than usual.
Cost of Renting
The renting cost is one of the primary reasons behind the housing affordability and affordable housing crisis in America.
As the renting cost is rising continuously, people won’t be able to afford basic living expenses as they need to use more than 65% of their monthly salary on rents. This will hurt economic growth.
These are the top 4 factors that affect housing affordability. If you have any more questions regarding this topic, feel free to comment below.