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Why Housing Costs are Through the Roof

When I wrote the Cost-Conscious Homebuyer’s Guide back in 1991, I described folks in the Washington, D.C. area with respectable incomes of $40,000 or $50,000—at the time the national household median income was $39,000—who couldn’t afford the median house price of $165,000. I was inspired to write the book from personal experience; as a member of a two-income (totaling $85,000) family in greater New York City who could barely afford the payments on a $165,000 mortgage.

I characterized these families as “members of a `houseless” population that doesn’t get much ink in the media—those with decent incomes who can’t afford the American dream.

Today, America’s median household income has barely budged to about $46,000 but the median home price in greater Washington is about nine times that figure: $365,000—a big multiple of the recommended income-to-home-price ratio of two-and-a-half times. Other areas of the country are even crazier—the median home price is about $500,000 in some parts of suburban New York City, more than $600,000 in Honolulu and more than $745,000 in San Jose, California. Our research shows that more than 32 million Americans are living in regions where the median home price is more than $350,000. Despite that fact, outside of California the housing affordability crisis STILL doesn’t get much ink in the media.

Why are home prices out of control? Part of it is easy money—the former Fed Chairman cut the federal funds rate more than five percentage points over a three year period. Some of it is artificially boosted by wealthy speculators who buy up luxury condos, like the Saudi Prince who is asking $135 million for his 16-bathroom getaway in Aspen. Some of it comes from the fact that mortgage debt has become securitized so that risky borrowers are more likely to become homeowners—easy money again.

But the most likely reason is that unlike many other purchases, in which consumers typically demand to get a “bang for their buck” and therefore create competitive pricing, prospective homeowners simply resign themselves to go head over heels in debt to afford a home rather than strike out for new territory as their forefathers and grandfathers did. While we are seeing a significant exodus out of Boston, Honolulu, LA, D.C. and greater New York, the movement is not dramatic enough to push the median home price down in these areas.

We’d like to reverse that trend by starting a “homeowner’s movement” that insists that it’s NOT gonna pay a lot for a home—the same way consumers used to vow they are “not gonna pay a lot for a muffler”. We’ve identified six areas of the country that are not only affordable but great places to live AND work—and most likely will be 20 to 40 years from now. Why does this matter? Because the roof over your head is an investment that needs to be attractive AND affordable for the next buyer. These locations are a win-win: they are affordable enough that you’ve got enough leftover disposable income to sock away in your 401(k) AND they also are good investments that will increase in value by the time you’re ready to sell.





Testimonials:

"Americans need this vigorous wake-up call if they are to make it through the first half of the 21st century. They are burying themselves in debt-for education, for homes, and for toys-leaving too little for savings and investment. Jane White shows them where they are going wrong and how they can put themselves right."

-Thomas G. Donlan, Editorial Page Editor, Barron's National Business and Financial Weekly

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