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 be able to save up a lump sum down payment that, in some cases, is now equaling to more than half of their annual household income. The home affordability crisis isn’t about the ability to pay a monthly mortgage, but rather 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 averaged a 5.4% increase per year, but suddenly it has skyrocketed at an alarming rate of 16% over the past 12 months.
Reasons for price increase
The Great Financial Crisis of 2008-2009 was largely responsible for shifting the tone for the housing industry. Corporations and individuals saw this as an opportunity to build homes and turn a quick profit, but it eventually led to an excessive amount of homes which later negatively impacted the housing market. As a result, for the past decade, the U.S. has “under built” homes causing 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, along with technology allowing people to work remotely, there was a mass exodus of city dwellers moving out to the suburbs. Now considered suburbanites, these individuals began buying houses at a rapid rate which created a boost in demand and therefore in price – driving up home prices 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 to away? There have been 10 years of under building so likely, no. Currently, the U.S. is experiencing serious supply chain issues and the housing market is not shielded from its impact. The supply chain issues, coupled with the massive demand, are lengthening that average build time – and driving us costs.
Home ownership challenges
The three main points that summarize the U.S. home ownership challenges:
- Home prices have gone up at 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 way was a good old reliable savings account followed by the more risk-taking option of dabbling in the stock market. Unfortunately, housing prices are increasing at a much higher rate as compared to the interest rates on an average savings account (0.06% is the national average rate) therefore widening the gap between being able to obtain home ownership and making it less affordable overtime. 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. In the past 100 years, there have been 26 times where the stock market has dropped by 20% or more. If a significant drop – or even a mundane one (5-10%) – occurs prior to a home purchase it can make an impact on people’s ability to be able 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 own portfolio – to obtain financial freedom, including the ability to save for the down payment on a dream home, has unveiled the patent-pending, low-risk LifeGoal Home Down Payment ETF (ticker: HOM). This first ever patent-pending investment is designed specifically 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 intention of the portfolio is to help investors keep pace with home price inflation, while attempting to control volatility and downside risk. HOM is a conservatively managed investment that combines ~70% bonds, that attempt to control volatility, with ~30% stocks. Within the stock exposure, there is an emphasis on housing-related stocks; these companies, like Home Depot, Lowe’s, etc., historically do well in a strong housing market, therefore helping offset the future home purchase. HOM is actively managed by a group of professionals and is the newest option on the market that will allow the average American to regain financial power and make homeownership possible again.
HOM is available for purchase through all major trusted financial institutions including Rohinhood, Charles Schwab, and more. To learn more, visit: www.lifegoalinvestments.com