Soaring house prices freeze low incomes

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If there were any doubts about the toxic effects of turbocharged home price appreciation, new survey data from the Federal Reserve Bank of New York should dispel them. According to the bank’s 2022 SCE Housing Survey, renters earning less than $60,000 a year attribute just a 33.5% average likelihood of owning a primary residence, the lowest since the start of the survey question in 2015 and down from 41.3% last year. Low-income US residents are losing confidence in their ability to tap into the housing market, the main driver of household wealth.

It’s not that they don’t want to buy a house, of course. According to the survey, 65.5% of these same tenants would “prefer” or “strongly prefer” to own property if they could afford it, and 67.5% think housing in their neighborhood is a “good enough” or “very good” investment. But the dream of home ownership simply seems out of reach.

The situation exacerbates the chasm between the haves and the have-nots. Most existing homeowners are sitting on appreciating assets whose gains have been amplified by leverage, and many have refinanced at mortgage rates near historic lows.

Unlike tenants, landlords always have options. Although the rise in rates encourages them to stay put, it is conceivable that they sell their existing houses which are appreciating quickly to buy another one, but with higher interest costs. This is why homeowners still see a reasonably high probability of buying if they move within the next three years, even though those probabilities drop for renters.

The results show how inflation in general – and rising house prices in particular – are often the most painful for low-income people. Wages are certainly recovering for the lowest quartile, but not enough to keep up with the rise in real estate costs. In 2022, high prices have been met with soaring mortgage rates, which means that the monthly interest and principal payment to finance a typical home with a 20% drop in the prevailing mortgage rate has increased by about one third. Unfortunately, the clearest path to rectify the situation – a prolonged period of high interest rates – can only make things more difficult in the short term.

More writers at Bloomberg Opinion:

• Real estate fever begins to erupt in Boise: Jonathan Levin

• Real estate bubble fears and your down payment: Alexis Leondis

• This is what long-term inflation looks like: Allison Schrager

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Jonathan Levin has worked as a Bloomberg reporter in Latin America and the United States, covering finance, markets, and mergers and acquisitions. Most recently, he served as the company’s Miami office manager. He holds the CFA charter.

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