Housing Affordability Crisis

Executive Summary:

The Struggle Is Real


Housing affordability is becoming a big problem in major cities across America. Especially here in California where I constantly read about housing affordability issues in the San Fransisco Bay Area. As a 27 year-old guy who’s still trying to figure out my path in life, it doesn’t help hearing my parents constantly asking me about home ownership. Last I checked buying a house isn’t cheap. To give you a visual, check out this affordability chart provided by the California Association of Realtors (C.A.R.).




Apparently only 29% of Californians can afford to buy a home. If you take a look far to the right, only 12% of the population in San Fransisco can afford to own real estate (holy shit!). My hometown of San Diego fares a little better at 26%, but that’s still pretty damn low. With home prices so high, and they’re still rising, is this even sustainable?


Econ 101


In my Market Outlook 2017 I noted that the real estate market is not in bubble territory. Current prices are still sustainable given that demand for housing continues to outweigh the supply. I believe this theme will continue to play out as homebuilders have been very cautious about overbuilding ever since the financial crisis back in 2008. In highly desirable areas like San Fransisco and New York there will always be enough demand that will continue to outstrip the available housing stock, therefore forcing prices to rise. In San Diego home prices are already hitting all time highs, see below.



In addition to supply/demand forces, wage growth is another important variable. This chart provided by C.A.R. shows that owning real estate in any desirable city in California will require around a six figure salary. In just 5 years since 2012 the salary needed to buy a home has increased about 100%.




The change in salary requirements during this time period seems pretty aggressive. Personally, I’ve grown my salary 87.5% during this same time period. However, I graduated from USC in 2012 and like clockwork I jumped ship every few years for jobs with better pay. Its hard for me to imagine an employer matching that same wage growth for employees who stay at the same company.


When I see charts like the one above, it concerns me that average folk out there won’t be able to purchase a home. Until there is an overbuild in residential property or we have another economic shock, high prices are here to stay.


So What’s The Game Plan?


Although I view buying a home as more of a luxury item, homeownership is certainly one of my goals in life. One day I’ll have to settle down and I think owning a home is an important part of raising a family. I’m starting to accept the reality that I can’t just drink beer and chase cute girls around forever =(.



My strategy for being able to afford a house one day is based off of a two-pronged approach. The first part is navigating the current market environment and the second part is positioning my finances so that I’m able to strike when the opportunity arises.


1. Understand The Market


It’s pretty clear to me that housing prices are being driven by market forces, which is out of our control. However, just like any other market out there, housing prices will continue to move in a cyclical fashion. We are still in a very low interest rate environment which forces asset prices to rise due to “cheap” money entering the system (thanks Janet Yellen). With this is mind, our focus shouldn’t be on buying assets while market forces are working against us. I would rather buy in an environment when asset prices are falling, which is typically in a rising rate environment. Just remember that you can always refinance a mortgage, but you can’t change the original purchase price.


Owning a house is part of the American dream and unlike any other investment asset, real estate holds sentimental and emotional value. This emotional element tends to blind home buyers into thinking that a home is still considered an “investment”. I stole the chart below from my article on Residential Real Estate Investing and I think it is an important visual to share with you here.



As you can see, in the most desirable cities it doesn’t pay to be a property owner. In my hometown of San Diego only 30% of homes can be rented out for a profit. This implies that cap rates are pretty much negative for most homes (ie. horrible investments).


What all this means is that it’s more profitable for people in high priced cities to be renters in the current environment. The cost savings from renting can then be invested in higher ROI opportunities, like stocks. No matter what the economic backdrop is we should always focus on allocating our capital to its most efficient uses. I think for patient and tactful individuals there will be better entry points into the housing market down the road (2019-2020 from what I’m reading).


2. Take Charge of Your Finances


It’s pivotal that you manage your finances appropriately and keep track of your spending. I use Personal Capital to monitor my spending and investment accounts (its also free!). Buying a home costs a lot of money so every bit of discipline on the spending and investing side can make a difference.


After saving and investing, I also recommend focusing on growing your income. I have no shame in admitting I’m job hopper. I’ve been able to grow my salary 87% over the past 5 years, which I believe is a much better rate than what I would have achieved if I stayed with one employer. There are always opportunities out there if you are willing to look. I think over the next few years we will be entering a prime job market where there will be high competition for skilled workers. Employment rates are already pretty low and there isn’t much slack left in the labor market. So assuming the economy doesn’t blow up, wages should really start to rise.


Check out this employment chart provided by the Paragon Real Estate Group. Unemployment is closing in on all-time lows, which should be a tailwind for wage growth.


Wrapping It Up


Housing affordability is a problem that a lot of people out there are facing. Instead of looking at the situation as a problem, I’d rather look at it as an opportunity. People jumping into housing now with negative cap rates are setting themselves up for financial disaster down the road. This is where disciplined individuals who focus on understanding market dynamics can win big in the long run. Within the current economic environment its more profitable to rent than to buy. Use this to your advantage! My plan is to save, invest and grow my salary, which will put me in a position of strength when housing prices eventually pull back. Its a simple plan and that’s why I like it. Hopefully you can apply the same concepts to your home buying plans.


Or……..you can always just buy a tiny house.



Let me know what you think about the housing market and your strategies on buying a home in this environment. Feel free to comment below!