Jill on Money: The housing affordability crisis

When the government released March inflation data, it showed that prices increased by 8.5% from a year ago, the fastest pace since December 1981. Gas (+48.8%), food (+8.8%) and used cars (+35.3%) showed eye-popping advances, but another line item is also worrisome: shelter, which increased by 5% annually. That may not seem so bad when compared to those other categories, but shelter accounted for nearly two-thirds of the monthly increase in the Core CPI, which removes the volatile food and energy figures.

The United States has a burgeoning housing-affordability crisis, and it's likely to persist longer than high prices in grocery stores and at gas pumps.

The problem can be traced to the bursting housing bubble of the 2000s. National home prices peaked in July 2006 and then bottomed out in February 2012, luring large investors to act. Private-equity firms raised money, bought up as many distressed properties as they could, fixed them up and rented them out. Although rents weren't going crazy yet, the money that these firms collected provided a better stream of income than they could find in the bond market, so they just held on.

The reduction in inventory, along with the slow pace of building in the aftermath of the housing crash, led to a shortage of homes and pushed up prices. "Real house prices — prices adjusted for inflation — have steadily increased in the U.S. since 2012," according to analysis from the Federal Reserve Bank of Dallas.

The pandemic only exacerbated the problem, as buyers, armed with excess savings and taking advantage of ultralow mortgage rates, flooded markets and gobbled up whatever was available. As demand soared, prices dwarfed wage increases, damaging affordability. Evidence points to "abnormal U.S. housing market behavior for the first time since the boom of the early 2000s."

Before you start dusting off the Great Recession playback, there are a couple of factors that may not spell disaster. Households are in better financial condition and banks have not lost their minds with out-of-control lending. But those facts only lessen the risk of a full-blown financial crisis — they do not solve for the affordability issue.

Just 15 months after mortgage rates bottomed out, 30-year fixed-rate mortgages have jumped above 5%, the highest in more than a decade. That has made the cost of carrying a home for the typical buyer a lot more expensive. "The combination of rising mortgage rates, elevated home prices and tight inventory are making the pursuit of homeownership the most expensive in a generation," according to Freddie Mac.

George Ratiu, economist at Realtor.com, notes that the cost of carrying a standard 20%-down loan for a median-priced home is "running $530 above a year ago, adding over $6,300 to the annual housing budget."

The news is not much better for renters, who are also contending with higher prices. As of March, rents have increased a whopping 17% from a year ago and are growing at about four times the pre-pandemic pace. While some cities are addressing the problem with more regulation to control increases, renters should be prepared to pay up and to explore alternatives before lease renewal.

That said, before you ditch the current place, remember that the cost of moving could be higher than the rent increase. Talk to your landlord well in advance of renewal and remind them that you love where you live and want to stick around. See if you can limit the rental increase by signing a longer lease or if you expect to earn more money later in the year, ask for a delay in the new price.