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With the cost of living increase, it is becoming even more difficult for working people to find appropriate living places. Although the majority still consider homeownership the hallmark of success, it’s now out of reach for many millennials and members of Gen Z. Many people currently live with the ever-present threat of homelessness from the next rent increase hanging over their heads, which takes a dangerous toll on their mental and physical health.
Why is it increasingly impossible to buy a home? Why are houses so expensive? Here are eight factors driving the current cost of living increase.
1. Investors Buying Available Inventory
The biggest factor influencing homeownership or lack thereof is one that few financial periodicals will dare to report out of fear of angering their wealthy patrons: it’s the investor class and their interest in owning every parcel of residential property possible. Last year alone, investors purchased over 30% of the available inventory, primarily in black neighborhoods. They then rent these homes out for profit as working people struggle.
Try as they might, even the most determined homebuyers can’t compete. Even a sizeable downpayment and killer credit score pales beside a cash offer. Furthermore, the median rent now surpasses $2,000, preventing many would-be purchasers from ever saving for a downpayment. It’s math — it’s simply impossible to afford life when half or more of your monthly income goes to a landlord, let alone put cash in the bank.
Unfortunately, American politicians seem allergic to rent-control measures, let alone limiting investor residential property purchases. One wonders what it will take before the homelessness crisis reaches a boiling point and something has to give.
2. A Smaller Than Average Supply
All those investor purchases result in a smaller than average home supply. This reality is complicated by other factors on this list that spur builders to construct less on spec and enact stricter standards for construction.
Furthermore, ongoing supply chain disruptions complicate the process of building new inventory. Builders might wait weeks, even months, for necessary materials, keeping would-be buyers waiting in the wings.
3. Higher Interest Rates
The federal government has taken action to combat inflation the only way it knows how: by raising interest rates. As a result, it’s now even costlier to buy a home.
While this shift may or may not tame out-of-control inflation, it has created an additional hurdle for homebuyers. Buyers who could once lock in a 30-year fixed for less than 5% interest may find themselves paying 7% or more by the end of 2022.
4. Increases in Local Zoning Regulations
Working people need homes. You’d think that the advent of the tiny home movement would usher in a flood of such communities offering affordable opportunities — yet this hasn’t happened. Why?
One of the problems is an increase in local zoning regulations. Many already dictated minimum square footages of 800 to 1,200 square feet, and some have added additional requirements. For example, some jurisdictions now place restrictions on accessory dwelling units to keep homeowners with large lots from renting out space for tiny homes or constructing them on their property.
5. Higher Builder Costs
Global supply chain issues and inflation resulted in soaring lumber costs during the pandemic’s early days. During the first year of the pandemic, the wholesale cost of plywood skyrocketed from $400 to $1,500 per square foot. The change resulted in a price difference of over $30 per sheet.
Wood isn’t the only material that’s contributed to the cost of living increase. Nearly everything is more expensive now, from nails to nail guns.
6. Builder Losses
Things are so bad that many builders have halted new construction for the moment, causing a further restriction of inventory. In some areas, the cost of land, construction and financing simply outstrips any potential profitability.
Furthermore, increased interest rates give builders pause, as they know fewer people will be able to afford to buy. The Fed has indicated that rates may go higher still, decreasing confidence in the market’s ability to support new construction.
7. Augmented Land Prices
Land is the one thing they aren’t making any more of — which explains why the investor class is so eager to get its hands on as much of it as possible. Unfortunately, all that demand for shrinking areas causes prices to skyrocket.
Even rural plots that formerly sold for $2,000 to $3,000 an acre now demand $10,000 or more. This reality creates further hardship for those who want out of the endless rat race and aren’t afraid to live rough to get off the rental roller coaster. If you dreamed of the “Grizzly Adams” lifestyle and want to secure a private piece of heaven, time isn’t on your side.
8. Low Wages
The final nail in the coffin of many would-be homeowners’ dreams is the reality that wages are simply too low for many to afford to buy. The vast majority of jobs in the U.S. still pay less than $20 an hour. That’s although three-quarters of them now require college degrees to get your foot in the door.
When you combine low wages with student loans, it’s easy to see how it’s impossible for many to save up the requisite downpayment. Even living with your folks for a while after graduation is no longer a failsafe, although that’s what many do to achieve some level of financial independence and stability. Those without parents or relatives to stay with don’t stand much of a realistic chance.
Consider the following grim realities:
- The average home now costs nearly half a million dollars, with residences in some cities ringing in at over a million.
- The average student loan borrower owes almost $40,000 by the time they graduate.
No matter how creative you get with the numbers, they don’t add up to homeownership becoming a reality for many. It’s a depressing reality, but for many, the words of the late, great George Carlin ring true: “It’s called the American dream because you have to be asleep to believe it.”
Cost of Living Increase Explained
Multiple factors explain why houses are so expensive. The rise of the investor class and concentration of wealth into the hands of fewer people is the presiding factor that few publications dare to mention.
Unfortunately, it’s harder and harder to achieve the American dream of homeownership. If you have the opportunity — take it. It may not come around twice in your lifetime.