The Growing Challenge of Housing Affordability

The cost of living has become a major political theme in recent years. And housing, particularly owner-occupied housing, continues to present a major affordability challenge, especially for low-income families.

Let’s take a look at Goldman Sachs Research’s latest findings.

For renters, housing costs are high by historical standards

Rent currently amounts to 32% of the average renter’s household income, higher than the 27% share that prevailed in the 1980s and 1990s.

Goldman Sachs Research finds that average rent-to-income ratios are fairly similar across metropolitan areas, but they differ substantially across income levels. While rent currently accounts for 55% of the bottom income quintile’s household annual income, it only accounts for 15% of the top income quintile’s household annual income.

The steep cost of homeownership

For prospective homeowners, the affordability math is even more daunting. In 2022, both the down payment-to-income and mortgage-to-income ratios surged to 30-year highs and have since remained elevated.

For young married couples considering the purchase of their first home, the average down payment is now 70% of their annual household income (vs. 58% in 2019 and 45% in 2000), and the first-year mortgage payment is about 25% (vs. 18% in 2019 and 20% in 2000).

Significant disparities in homeownership costs persist across metropolitan areas and income levels, and these differences have become even more extreme over time.

In the chart below, the left panel shows that even in 2000, the combined down payment and first-year mortgage costs for owner-occupied homes in the three largest metros (Los Angeles, San Francisco, and New York) had already reached 120% of household income, higher than the 65% average in smaller metros.

Currently, these large metros are even more expensive. First-time home buyers now need to spend almost two years of their household income on average for the down payment and first-year mortgage, significantly higher than the 80% share paid by households in the rest of the US outside the largest cities.

The affordability of owner-occupied housing has deteriorated most in large metropolitan areas and for lower-income households

In the past two decades:

• For households in the bottom income quintile, the cost of owning has risen substantially from 90% to over 160%.
• For the second-lowest quintile, it has grown from 60% to 100%.
• For households in the top income quintile, the cost of owning has only increased from 40% to 60%.

Housing unaffordability is more than just a cost-of-living problem

Why is the issue of housing affordability so important? First, homeownership is the primary way that many households, especially low-income households, save and build wealth. Real estate assets account for nearly 70% of household net worth in the bottom income quintile, but only 20% for households in the top.

Second, in the US, neighborhoods offering high-quality public schools and other public amenities are predominantly owner-occupied (left, in the chart below), and the quality of these local public schools is also positively correlated with local home prices (right, in the chart below).

As a result, for many households, the unaffordability of owner-occupied housing is more than just a cost-of-living problem. It also means higher barriers to building wealth and more limited access to education services, job opportunities in large and growing cities, and long-term social mobility.

In the US, high-quality public schools are generally located in neighborhoods that are predominantly owner-occupied

Restrictive land use regulations driving housing shortage

In a report from last year, Goldman Sachs Research noted that restrictive land use regulations are the primary driver of the US housing shortage.

These regulations come in many forms and differ substantially across jurisdictions. Some regulations set a maximum height for residential buildings, some set a restriction on minimum lot size and open space, and some regulate the maximum number of households allowed to live in a building. Regardless of their specific forms, land use regulations in general are very stringent in the US.

Goldman Sachs Research believes large-scale reforms that relax local land use regulations could help boost housing supply and alleviate the affordability crisis. However, local communities set land use regulations in the US, and changing these regulations will likely involve complex legal and legislative processes.