The pandemic has sent the U.S. housing market into overdrive. Soaring home prices are making it nearly impossible for the average American household, which earns less than $80,000 per year, to save up a lump sum for a down payment. In some cases, this sum is now equal to more than half of their annual household income. The home affordability crisis isn’t about the ability to pay a monthly mortgage. Instead, it is about an individual’s ability to deposit, on average, $46,776 as a down payment. Over the past 50 years, U.S. home prices have increased at an average annual rate of 5.4%. However, they have suddenly skyrocketed at an alarming rate of 16% over the past 12 months.
Reasons for price increase
The Great Financial Crisis of 2008-2009 was primarily responsible for shifting the tone for the housing industry. Corporations and individuals saw this as an opportunity to build homes and make a quick profit. This eventually led to an excessive number of homes, which later hurt the housing market. As a result, for the past decade, the U.S. has “underbuilt” homes. This has caused the supply and demand balance to shift once again. This is what is sending home prices soaring.
The COVID-19 pandemic exacerbated the supply-demand imbalance even further. Due to health concerns, combined with the ability of technology to enable remote work, there was a mass exodus of city dwellers moving to the suburbs. Now considered suburbanites, these individuals began buying houses at a rapid rate and investing in upgrades. These upgrades include installations like a whole house Reverse Osmosis System for water quality. This surge in demand and home improvement spending consequently led to a rise in prices. As a result, home prices increased at a rate almost three times the long-term average.
The shift of balance between supply and demand is the true culprit behind soaring home prices.
A shift on the horizon
Are the high prices going away? There have been 10 years of building, so likely, no. Currently, the U.S. is experiencing serious supply chain issues. The housing market is not immune to their impact. The supply chain issues, coupled with the massive demand, are lengthening the average build time. This is driving up costs.
Home ownership challenges
The three main points that summarize the U.S. homeownership challenges:
- Home prices have gone up by 16% over the past year
- The average person saves for 6.5 years for their home down payment
- The money generally sits in a savings account
Old versus new
Traditionally, there were two main ways to save for a home. The most common approach was a traditional savings account. This was followed by the more risk-taking option of investing in the stock market. Unfortunately, housing prices are increasing at a much higher rate compared to the interest rates on an average savings account. The national average rate is 0.06%. This rate is thereby widening the gap between obtaining home ownership, making it less affordable over time. When it comes to the stock market, rewards can be immense, but negative impacts can also be significant. It is all a game of risk. Over the past 100 years, there have been 26 instances where the stock market has declined by 20% or more. If a significant drop – or even a modest one (5-10%) – occurs before a home purchase, it can impact people’s ability to afford a home.
Latest solution on the market
With new challenges come new solutions. LifeGoal Investments, a family of funds for people who want to invest – but lack the time or confidence to build their portfolio – to obtain financial freedom, including the ability to save for the down payment on a dream home. This company has unveiled the patent-pending, low-risk LifeGoal Home Down Payment ETF (ticker: HOM). This first-ever patent-pending investment is explicitly designed to empower the average American to grow their money.
The goal behind HOM is to make homeownership more attainable. With the rapid increase in housing prices, the portfolio aims to help investors keep pace with rising home prices. Simultaneously, it seeks to mitigate volatility and downside risk. HOM is a conservatively managed investment that combines ~70% bonds, which attempt to control volatility, with ~30% stocks. Within the stock exposure, there is an emphasis on housing-related stocks. These companies, such as Home Depot and Lowe’s, have historically performed well in a strong housing market. This performance helps offset future home purchases. A group of professionals actively manages HOM. It is the newest option on the market, allowing the average American to regain financial power and make homeownership possible again.
HOM is available for purchase through all major, trusted financial institutions, including Robinhood, Charles Schwab, and more. To learn more, visit: www.lifegoalinvestments.com
