Normally, in these articles, I have a point of view and explain why I hold that perspective. I also discuss how to achieve and excel using that POV. But in today's topic, I don’t have a concrete POV—it’s about homes and the role they play in personal finance.
First Things First
One of the major fixed costs for people is housing. Whether it's a mortgage or rent, a significant percentage of people don’t own their homes free and clear. Housing costs are one of the largest expenses for individuals and families, often consuming a substantial portion of their income.
Due to housing costs being one of the major fixed costs, most financial products that target mortgages and rents are seen as surefire and extremely safe. Why? Because for most people, their home is most likely the greatest asset they'll own. The median net worth of homeowners in the U.S. is $255,000, compared to just $6,300 for renters (Federal Reserve, 2022).
Additionally, there’s a widespread belief that land prices appreciate over time, which drives property values up. However, this isn’t always the case, as demonstrated by the 2008 financial crisis, which saw U.S. home prices drop by nearly 30% (S&P Case-Shiller Index). This singular event has caused significant doubt about the infallibility of real estate as an investment.
The Cultural Significance of Homeownership
Owning a home is seen as a major achievement among individuals. From young people owning their apartments to middle-aged couples nearing the end of their mortgage, the dream of owning a home is well-established in our psyche.
In a 2021 survey, 87% of Americans said owning a home is part of the "American Dream" (Bankrate). However, the reality is that housing costs are often prohibitively high.
The Global Housing Affordability Crisis
Looking at the data globally, most young people cannot afford to own a home. In 2023, the average home price in the U.S. was $416,100, while the median household income was $74,580 (National Association of Realtors, U.S. Census Bureau). This means the average home costs about 5.6 times the median income, far above the traditional affordability benchmark of 2.6 times income. In other countries, the situation is even more dire. For example, in Canada, the average home price is 9 times the median household income, and in Australia, it’s 8 times.
For those with a mortgage, payments have become even more difficult and costly due to rising interest rates. In 2023, the average 30-year fixed mortgage rate in the U.S. reached 7.5%, the highest level in over two decades (Freddie Mac). This has significantly increased monthly payments for new homeowners.