Tom and Audi Marshall are slipping into a housing affordability gap that's swallowing up a growing number of Americans every year.
The Oxnard couple brings in a hefty $50,000 annually, and could comfortably handle a mortgage payment as high as $1,400 a month. But after the rent is paid, food is bought and car payments made, there just isn't much left to save toward the 10% or 20% down payment needed to purchase a home in their middle-class neighborhood.
"Our only real problem is saving money for the down payment," says Tom, an electronics technician. "I mean, how do you save $20,000 or $30,000? It seems impossible ."
The Marshalls aren't alone. Across the nation, millions of Americans who want to buy a home, simply can't. Even though many could meet the required monthly payments, most can't scrape up the tens of thousands of dollars for a down payment that most lenders require.
On its face, the affordability problem doesn't seem too severe. The home ownership rate peaked at 65.6% in 1980, meaning that nearly two-thirds of all American families owned their own home.
But that rate has dropped every year since then--despite a general decline in mortgage rates--and now stands at 63.8%. Although that doesn't seem like a serious reduction, it means that nearly 2 million fewer families own homes today than would have if the previous rate had been sustained.
Saving for Down Payment
Older people aren't feeling the crunch as badly as younger ones. Since most older families already own their house, they've built up plenty of equity that can be used as a down payment on their next home.
"It's the younger people, under 35, who are having the most trouble buying a house," says John Tuccillo, chief economist of the National Assn. of Realtors. "And their No. 1 problem is saving up for a down payment."
The home ownership rate for 25- to 29-year-olds has dropped from a peak of 44% in 1979 to about 36% today, Tuccillo says; the group between the ages of 30 and 34 has experienced a similar decline.
While lower interest rates have made monthly payments easier to handle, soaring prices have made it tougher to come up with a big down payment.
"But it's not just the low-income people who are experiencing that problem any more," Tuccillo says. "It's middle-income people, too, and even some people who are fairly well off."
Gap in Affordability
Nowhere is the so-called "affordability gap" wider than in California, a state where the median-priced home costs nearly $152,000--roughly 70% above the national average.
To buy a typical California home with conventional financing, a buyer would need a 20% down payment of $30,400, another $3,000 or so for various fees, and would have to earn about $50,500 annually to assure the lender he could make the $1,262 monthly payment for principal, interest, property taxes and insurance.
And that's with interest rates at 10%. All those numbers will go up when rates start rising again, which many economists say, will happen soon.
Only one in four potential buyers in California makes the magic $50,000 annually, and even fewer have $30,000 in the bank, according to California Assn. of Realtors' chief economist Joel Singer. "We're becoming a state--in fact, a nation--of housing haves and housing have-nots," he says.
See Tax Benefits
While young people's ability to buy their own home is shrinking, their desire is growing stronger. According to one survey, buying a home is now at the top of the wish list of people in the 25-34 age group, even ranking above good health.
One reason for their motivation: The 1986 Tax Reform Act, which preserved deductions for mortgage-interest payments but eliminated or reduced write-offs for other investments.
The housing affordability problem didn't happen overnight; most economists say its roots go back to the early 1970s.
If any one year could be considered the "official" start of today's affordability problems, it would probably be 1974. For the first time since real estate trade groups began keeping statistics, home prices in both California and the nation that year rose more than 10%.
Severe Price Increases
Double-digit increases continued until 1981, as the inflationary spiral was fed by the millions of baby boomers who were entering the prime home-buying age, and speculators bought and sold properties at a record pace.
Price increases were particularly severe in California, as the state's booming economy attracted more and more people and builders couldn't keep up with the growing demand for housing.
Wages, however, didn't keep pace with skyrocketing home prices. In 1974, the median price of a home was $34,100 in California and $32,000 nationwide.
Although housing prices have risen an average 11.6% annually in California and 4.3% nationwide since then, inflation-adjusted wages have risen only about 3% a year.
Soaring Mortgage Rates