The Urban Institute says that homes categorized
as low priced, that is in the bottom 20 percent of the distribution, appreciated
126 percent between the turn of the century and the end of 2019. During that
same 20-year period, those in the top 20 percent of the price distribution
increased only 87 percent.

 

 

An analysis of 285 metropolitan
statistical areas (MSAs) by Jung Hyun Choi, John Walsh, and Laurie Goodman found
that rapid employment growth combined with supply constraints from zoning and
other regulations was one driver of this disproportionate price growth on the
low end.

Those MSAs with the greatest
constraints
on housing inventory experienced the greater price growth on the
low end relative to the high. They measured this using two indices, Wharton
Residential Land Use Regulatory Index and the Saiz Land Unavailable index. They
also found that MSAs with a larger number of employed people in 2000 and higher
employment growth experienced larger low tier price increases.

For example, low priced homes in Los
Angeles saw a 313 percent increase over the 20-year period while prices
declined 5 percent in Detroit. High priced homes increased to the greatest
degree, 190 percent, in San Francisco but saw only 42 percent growth in
Saginaw, Michigan.

The increase of housing prices is one
reason UI says that, before the COVID-19 outbreak, affordability was one of the
biggest problems facing the housing market. But it wasn’t the only reason.

The faster appreciation of low-priced
homes is naturally felt the hardest by low income earners, both homeowners and
renters, especially those in the bottom 25 percent of the income distribution.
As home prices rise, potential homeowners with low incomes have trouble finding
affordable homes so they remain renters, driving up demand for rentals and rent
prices.

And, while the cost of both owning
and renting
has risen substantially for low-income households (an increase of
5.4 percent for homeowners and 10.9 percent for renters), those in the top
quartile of income distribution saw their housing costs drop by 5.7 percent
between 2000 and 2018.

These high-income homeowners also
experienced the greatest increase in income, which led to a 10 percent increase
in their residual income (household income minus housing costs) and a 1.2
percent drop in their housing cost burden (the ratio of housing costs to income).

Meanwhile, the residual income of
low-income homeowners and renters dropped 14.5 percent and 24.3 percent.
Although housing cost growth was highest for high-income renters, their growth
in household income largely compensated for the increase in cost.

Overall, low-income renters and
homeowners, whose incomes did not fully recover after the Great Recession, had
24 and 15 percent less residual income, respectively, in 2018 than they did in
2000, while high-income renters and homeowners had 4 and 10 percent more,
respectively.

 

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Despite the massive unemployment
triggered by the pandemic, there has not yet been much impact on home prices as
both supply and demand shrank simultaneously. But UI points out that lenders
have been further closing down already tight credit. This will hit low income
households the hardest
and they will likely face greater difficulty accessing
homeownership, even for homes within their financial reach. However, those with
high incomes and credit scores will probably have more opportunities to buy
homes and build housing wealth as the economy recovers from the coronavirus shock.

The home price trajectory is
unlikely to change
as demand from both owners and renters continue, but it is also
the low-income homeowners and renters who tend to be working in industries more
vulnerable to the pandemic shock. Owners may struggle more to sustain that
status once the forbearance period is over while renters are less likely to be
able to achieve homeownership. The homeownership rate is expected to decrease,
making it harder for many families to build wealth.

The authors conclude that, if the pre-pandemic
supply constraints remain unaddressed, “both low-price home and rental prices
will continue to increase faster than prices for high-price homes, widening
residual income inequality between low- and high-income homeowner and renter
households. This could also hurt the ability of low-income households to build
financial strength and could make them more vulnerable to future economic
shocks.”

By Jann Swanson , dated 2020-06-04 14:11:51

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Courtesy of Mortgage News Daily

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