Affordability and the Future of Homeownership

After 12 years of post-graduate education, I entered private practice in the healthcare industry in a new town during the summer of 1981. I was so enthusiastic about starting my new career that I didn’t understand the economy was in dire shape. I was just delighted to find a bank that would provide a business loan at 21% interest rate so I could open my practice.

Four years later the commercial loan for my small office building was 10% that floated with the 10-year US Treasury. Fortunately, interest rates were gradually decreasing but the economy was still struggling. A year later we purchased a 1,324 square foot home with a first mortgage and a second mortgage from the seller. The 30-year owner-occupant mortgage interest rates were around 15%.  Yet, there were still people like us still struggling to purchase homes.

Data indicates that average homes which sold for $47,200 in 1980 sold for $301,000 in 2021. That same data fails to reveal the original homeowner likely paid at least $222,600 in principal and interest on the first mortgage. Taxes, insurance, and maintenance expenses likely pushed the costs for owning that home over the amount of the eventual selling price.

So, homeownership is not the key to wealth for the first generation. Obviously, a mortgage-free house will contribute to their financial security during retirement. It certainly contributes to generational wealth if the transfer to adult children is managed properly.

Affordability is a relative term and made even more confusing by the media. From the Seller’s perspective, all houses will eventually sell; however, the price may be considerably lower than the price they wanted. From a Buyer’s perspective, there will always be an affordable house on the market, it just may not be the house they wanted.

The Affordability Gap is not specifically a real estate industry problem, it is essentially a gap between wants and needs.  Lifestyle Creep has created a large segment of American society whose wants increasingly exceed their needs, and in many cases, exceed their budgets.

A recent survey indicated 72% of renters would prefer to own a home “if they could afford it.” However, the obvious follow-up question was lacking. How many of these prospective homebuyers were actually living below their means and aggressively saving money for a 20% down payment or more, so they could qualify for a mortgage to purchase the house they need?

The rising delinquency rate on consumer credit, automobile loans, and student loans indicates that these burdens on prospective homebuyers may seem like the problem on the surface, but it is not the root cause of the affordability problem.

The reason the mortgage industry allows the use of leverage so effectively is because most homeowners have “skin in the game.” The “no money down floating interest rate loans” are not the key to stability in for homeowners. Bundling subprime mortgages with quality mortgages to sell to unsuspecting investors as collateralized mortgage obligations is not advantageous to future homeowners because these risky financial products eventually increase borrowing costs for responsible borrowers.

How Will the Housing Affordability Gap be Closed?

Everyone can remember the sudden economic downturn of 2008. The subprime mortgage debacle almost crashed the global financial system.

During his Senate confirmation hearing in November 2005, Ben Bernanke confidently

stated that “derivatives, for the most part, are traded among very sophisticated financial institutions and individuals.” He went to assure the Senate, “The Federal Reserve’s responsibility is to make sure that the institutions it regulates have good systems and good procedures for ensuring that their derivatives portfolios are well managed and do not create excessive risk in their institutions.”

In January 2008 Bernanke stated, “The Federal Reserve is not currently forecasting a recession.”  In July 2008 he said, “Fannie Mae and Freddie Mac are well capitalized and in no danger of failing.”

On September 18, 2008 while speaking to President Bush in the Oval Office following the Lehman Brothers failure due to their derivatives losses, Treasury Secretary Hank Paulson stated, “We are in danger of a broad systemic collapse, and action needs to be taken urgently to head it off. We need the authorization to spend several hundred billion dollars.” Ben Bernanke stated, “The kind of financial collapse that we’re now on the brink of is always followed by a deep, long recession.”

In his book, The Price of Tomorrow, Jeff Booth wrote, “It wasn’t housing itself that caused the 2008 bubble. If it hadn’t been housing, it would’ve been somewhere else that easy credit was flowing to. The continuing rise of debt that cannot be paid back was at the heart of the housing crisis and will be at the heart of the next crisis.”

Easy credit was the cause of the technology stock bubble that burst in the early 2000s.  It was the cause of the financial crises in Argentina, Greece, and Venezuela. The overwhelming stimulus to the pandemic is what created the inflationary circumstances America and the rest of the world are facing today.

The entire financial system is based upon trust – the trust that borrowers will repay the money they borrowed plus interest. When trust collapses on a wide scale the entire system will collapse. In America, 70% of GDP is based upon consumer spending.  Defaults on credit card payments and auto loans are currently at historic highs. Since housing costs are 40-50% of household income, most households are not able to sustain their lifestyle on the money left over.

The Federal Reserve likes inflation because it tends to make people with assets feel better off. Homeowners use home equity loans to purchase cars, boats and vacations under the illusion that the equity will be replaced by increased value (inflation).

Therefore, the ultimate fear of the Federal Reserve is deflation – when the value of goods and assets lose value. Deflation helps the majority of the working class because their rent remains flat or decreases, goods and services cost less, so they can buy more with their current income. This is assuming they remain employed.

Technology is the greatest deflationary force of our time. In 1957 IBM released the first personal computer, which was called the 610 Auto-Point Computer and cost $55,000 ($460,000 adjusted for inflation).  When Motorola created the first portable cellular phones, they cost $2,000 and AT&T charged $1.50 per minute for talking. In 1991 Kodak released the DSC-100 at a cost of $20,000 ($35,000 adjusted for inflation)!  Many Smartphones today are almost free with a cellular plan, barely charge for talking, and they are better computers, and better digital cameras than those costly original inventions.

Smartphones are merely a forerunner of what the world can expect from artificial intelligence. AI Technology will become a powerful deflationary force in the economy that should reduce of goods and services, and currently over-valued assets like stocks and houses. The value of earned income will increase to give workers greater purchasing power, and interest rates will decline because today’s dollars will be worth more in the future.

It is obvious the current debt-fueled economy is unsustainable. Will the current housing affordability gap be closed suddenly by the next economic collapse, or gradually by the growth of technology? And, if the later, what impact will technology have on the workforce?

Unaffordable or Financially Illiterate?

Financial literacy in the US remains stagnant, with approximately half of American adults unable to answer basic financial questions correctly, a trend that has held steady since 2017

. Key challenges include poor retirement planning, low comprehension of financial risk, and limited understanding of compound interest. While mandated high school finance education is increasing, many adults still feel unprepared, with 57% living paycheck-to-paycheck

• Low Illiteracy Persists: Data from a 2025 study indicated only 49% of American adults were able to correctly answer basic financial questions.
• Retirement Anxiety: Approximately 24% of U.S. adults lack an emergency savings account, and more than 33% cannot manage an unexpected emergency expense that exceeds $400.
• Mismanaged Debt: Almost 50% of American workers report that consumer debtsrestrict their ability to save for a retirement account. Moreover, 61% admitted they were living paycheck-to-paycheck.
• Financial Education: Approximately 95% of high school students agree that a personal finance class would be valuable, especially those students who are worried about paying for college tuition and related expenses. Nevertheless, on 35 states require personal finance classes in their high schools.
• Risk Comprehension: The weakest area of financially literate high school students was the understanding of investment risk.

Tragically, the lack of financial literacy among young adults, and the rise of financial influencers on their social media news feeds, causes too many of them to make poor financial decisions. There are followers of a 19-year-old high school graduate who advises followers to use his “strategy” to get rich by taking out high-risk loans to purchase multi-family rental properties without investing any of their own money, and without the knowledge to manage rental properties.

Homebuying Knowledge Gap

According to a recent article in USA Today, many prospective homebuyers lack essential knowledge about the homebuying process. Foremost among this knowledge base are credit scores, credit card balances, motor vehicle leases/loans, and the importance of their employment history.

• A FICO survey revealed 59% of Americans do not fully understand the process involved with purchasing a home.  This statistic rises to 64% for first-time buyers.
• The survey also indicated that 25% of prospective homebuyers do not know their FICO credit score before they begin searching for a home on the internet, so they are surprised to discover that most conventional mortgages require a minimum credit score of 620.
• Approximately half of prospective buyers do not understand the application, pre-approval, home appraisal, and loan underwriting process necessary to secure a home mortgage.
• About 25% of prospective homebuyers underestimate how much a lower credit score increases the interest rate on their home mortgage because they are considered a higher risk for defaulting on the loan.

It is unfortunate that to many homebuyers worry about being accepted for a loan rather than the costs of the loan. They focus on the amount of the down payment and the monthly payments while ignoring the risks of Adjustable-Rate Mortgages (ARMs) as well as the loan fees, private mortgage insurance (PMI), and charges for points that may be added to the amount of the loan.

The lack of essential homebuying knowledge results in people searching the internet for homes they want before they determine the kind of house they can actually afford. They should follow Stephen Covey’s advice, “Begin with the end in mind.” This approach will minimize emotion stress and lead to much more favorable outcomes.

Prospective homebuyers are often emotionally and financially unprepared to cope with the common “deal killers” that follow the acceptance of their offer to purchase a house. Although major problems discovered during the home inspection are by far the greatest reason for terminating a contract during the option period, the second most common reason (27.8%) is failure of the financially stretched buyer to survive the mortgage underwriting process.

Financial factors that adversely affect the underwriting process are changes in the buyer’s employment status, discovery of undisclosed debts/liens, adding new consumer debt, or unexpected medical expense that depletes cash reserves. Failure to prepare emotionally for what is often the homebuyer’s largest financial transaction can lead to “buyer’s remorse.” Submitting an offer to purchase, especially during a competitive seller’s market, and having it accepted by the seller is often an exhilarating experience. This is soon followed by the stresses and unexpected surprises that arise during the transaction that often lead to doubt and possibly regret.

Let the Seller Beware: The 44 Buyer Outs in the Texas Real Estate Contract by Reba Saxon explains the many ways homebuyers can legally cancel a Sales Contract without losing their earnest money deposit. Although the Sales Contract is intended to protect the rights on homebuyers who get “cold feet.”

Nationwide data revealed that 16.3% of the homes under contract were cancelled during 2025. Some metropolitan areas experienced the highest cancellation rates. Atlanta saw 22.5% of contracts fall through, while Jacksonville and San Antonio experienced 20.6% cancellations.

Experts suggest that cancellations are increasing in 2026 because the tide has turned toward a buyer’s market. I some areas there are twice as many homes for sale as there are buyers looking to purchase a home. Economic and geopolitical uncertainty, along with historically high home prices, seems to trigger cancellations among financially insecure homebuyers.

Future of Residential Real Estate

Ultimately, the entire future of the residential real estate industry will be dependent on the financial literacy, the budgetary discipline of prospective homeowners, and purchasing of an affordable starter home so households can accumulate equity toward the eventual purchase of their dream home. These households must make the sacrifices necessary to purchase a starter home for which they are financially qualified and emotionally prepared to purchase.

Parents and our educational institutions must provide better financial education for our youth to ensure a brighter future for residential real estate in America. If more of our younger generations give up on the dream of eventually owning a home, they will stop saving for a better future for themselves and their children. Then, as we are observing in population growth areas, the residential real estate industry will increasingly become dominated by investors to accommodate a generation of perpetual renters.

In 2024, Wall Street firms significantly increased their investments in single-family rentals. The investment surge was especially noticeable in build-to-rent developments. These communities offer upscale amenities now, but what happens when maintenance costs increase and cash flow decreases?

Economists at the Federal Reserve recently concluded a study that exposed the influx of approximately 10 million undocumented migrants as the primary cause for the dramatic increase in rents and housing prices. Obviously, the demand dramatically exceeded supply during 2020 to 2024.

During the last two years the reduction in demand and the gradual increase in housing supply has slowed the rise in rents and home prices in many areas of the country. Moreover, the steady improvement in the economy has finally caused the growth of household incomes to exceed inflation.

A bright future for residential real estate and financial success of the next generation of Americans depends on improving private homeownership. Households taking pride in their homes and neighborhoods – maintaining their property, upgrading the homes, and contributing to their communities.  It’s the pride of homeownership that supports a stable real estate industry, which perpetuates the American Dream.