Measuring the Gap Between Housing Aspiration and Affordability

The FINANCIAL — Americans tend to have high expectations when it comes to their homes, and those tendencies are creating an interesting dynamic in the U.S. housing market, according to The Nielsen Company.

In short, this “eyes are bigger than the stomach” scenario has created a significant gap between the homes Americans aspire to purchase and the ones they can actually afford. In fact, even after the Great Recession and the collapse of the housing market, there remains a notable discrepancy between what people spend on housing and what their budgets can sustain.

The interesting facet in the “affordability gap” scenario, however, is that affordability is the second-most relevant criterion homebuyers consider when they’re looking to buy a home, according to the new “A Tale of 2,000 Cities” report prepared by The Demand Institute. In preparing the report, The Demand Institute interviewed the heads of 10,000 households in all types of housing across the U.S. to gain a detailed understanding of consumers’ views about their homes.

Among the heads of households surveyed, 81 percent said that a home—regardless of owned or rented—needs to fall within a budget without imposing the need to make serious sacrifices. And what’s more, many households believe their situations fall outside of this basic criterion. Almost half of those who are planning to move, and one-third of those who are not, are in this category, according to The Nielsen Company.

So why do people let their homes take over their wallets? One-third of the respondents to The Demand Institute survey said household expenses ended up much higher that they expected when they moved into their homes. And as a result, they struggle to stay on top of their bills. And it’s not just a matter of catching up, either. Almost half of the respondents said they don’t believe their financial situations will improve, which means the affordability gap isn’t likely to close.

But households aren’t just becoming less careful about their responsibilities. The Demand Institute’s 2013 study suggests that the housing cost burden is rising, and that increase is creating a bigger burden than before the housing crisis. The 2013 Demand Institute survey pegs the share of households with a moderate or severe housing cost burden at 41 percent, according to The Nielsen Company.

The issue is notably affecting renters, who have faced escalating rental rates in the aftermath of the housing and financial crisis. In fact, one in four renters say they spend more than 50 percent of their pretax household income on essential housing expenses. Consequently, they’re growing increasingly unable to save for a down payment for a mortgage. And to make matters even more challenging, today’s mortgage climate is bound by tight lending conditions, which makes securing a mortgage and becoming a homeowner more difficult.

Despite the tough financial realities facing many renting households, the market is currently ripe for homebuyers. Mortgage rates are generally affordable and the National Association of Realtors’ national and regional affordability indexes remain at historically high levels, according to The Nielsen Company.

Even when facing what appear to be steady headwinds, however, many households still see homeownership in their near futures. In fact, more than half say they plan to purchase a home—many for the first time—the next time they move. And half of those planning to rent their next home said they plan to purchase eventually.

And what type of housing appeals the most? Single-family homes. Approximately 60 percent of the respondents planning to move—including renters—say they would like to live in a single-family home rather than a unit of multifamily housing, according to The Nielsen Company.

There is evidence, however, that some of these aspirations may go unfulfilled. First, many prospective homebuyers have unrealistic purchasing and financing plans, largely because of all that’s involved with obtaining a mortgage, including a down payment. In fact, of those planning to purchase a home within the next five years, almost 45 percent report they do not yet have the level of savings and equity needed.

Through its research, The Demand Institute projects that about four million households will not realize their purchasing aspirations. And the vast majority of those households will, instead of purchasing a single family home, instead rent a multi-family dwelling, according to The Nielsen Company.