Housing in America is both more affordable and more expensive than it's been in years - here's what that means for millennials

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Mortgage rates have hit historic lows in the US, making housing more affordable than ever.

• Housing in America is more affordable than it's been in years when seen through the prism of historically low mortgage rates, but housing is still more expensive than ever.
• Housing prices are exceeding wage growth in metro areas, where millennials - who are entering their homebuying years - typically seek jobs.
• Homebuyers are typically relocating to cheaper metro areas and the suburbs, but that move has resulted in tougher commutes and overpopulation.
• Lower mortgage rates are temporary and don't help millennials who can't afford a down payment. Experts say we need more starter homes on the market.
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At first glance, housing in America is looking bright.

Homes are more affordable than ever for the typical American family due to historically low mortgage rates, according to the National Association of Realtors' (NAR) affordability index.

And other stats paint a bright picture: Homebuying kicked off strong at the beginning of 2020, with purchase mortgage applications reaching their highest point for January in 11 years. That followed the fourth quarter of 2019, which was the biggest quarter for mortgage lending since 2005.

All this data marks a major turnaround from the housing market slowdown that characterized the first half of 2019, when mortgage rates went up and scared buyers away, Jeff Tucker, economist at Zillow, told Business Insider. "That threw some water on markets that had been on fire for a few years," Tucker said. Now that the Fed has reversed course by lowering short-term interest rates, it costs less to buy a house than it did in the early 2000s, he added.

It all seems to have created the perfect set-up for aspiring millennial homeowners to fuel the housing market in 2020. But Tucker saw a dark lining: Reigniting the housing market is making it hot again.

Mortgages are super-affordable while housing keeps getting more expensive, and it's most expensive in metro areas

When you look at the American housing picture up close, the dark lining suddenly becomes a massive shadow. Mortgage rates have made housing more affordable, but housing prices keep steadily increasing, especially in urban areas. And housing prices are going up faster than people's wages.

The retreat of homebuyers in early 2019 left a surplus of houses on the market - but the rising desire to buy again is creating a competitive market that's decreasing the housing supply and thus raising prices, Tucker said.

Housing prices are skyrocketing so much that they're consistently rising above people's income, Dr. Lawrence Yun, chief economist of NAR, told Business Insider. It's a heightened issue in metro areas, where home prices increased by 6.6% in the fourth quarter of 2019, outpacing wage growth.

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Housing prices in metro areas like San Jose are exceeding wage growth.

That's especially problematic for millennials, who are already financially behind from the fallout of the recession. Jobs are typically plentiful in large cities, making them a prime place for the generation to grow their careers. Given job location, Yun said, people will pay a premium to live closer to cities and millennials in particular can be inclined to take a job with a higher salary, even if it means living in a more expensive area such as San Jose.

This imbalance in growth between housing prices and income means not all millennials can afford to move to the areas that would be best for their careers. And, those already living there can't afford to transition from renting to buying.

The search for affordable housing is impacting the suburbs

High housing prices have also begun to kick people out of cities as they pursue more affordable places to live.

Some are moving to new cities altogether. Consider those trading in Los Angeles - now the least affordable housing market, as measured by the NAR and Wells Fargo Housing Opportunity Index - for cheaper metro areas such as Las Vegas. Others are relocating to the suburbs, where housing prices haven't risen as consistently as those downtown, according to Yun.

For example, homes in the median central core of the Boston metro area cost 303% more per-square-foot than the typical outlying home. A driving factor behind the price difference between the suburbs and the core city center is that houses in the suburbs are less scarce as it's generally easier to add more homes outward, known as urban sprawl, Tucker said.

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Housing is more attainable in the suburbs, but it doesn't come without consequences.

And it's not just new homeowners looking for cheaper places to live - nearly half of Americans who already own homes plan to move in the next decade, according to a LendingTree survey, mainly citing a lower cost of living.

But both Tucker and Yun pointed out the price one pays for more attainable housing in the suburbs: a longer commute. According to Tucker, the influx of people moving to outlying areas has worsened and congested commutes over time. Consider the millennials flocking to the exurbs, putting up with two-hour commutes so they can become homebuyers.

The search for affordable housing is overpopulating some suburbs, with sometimes serious consequences. Look no further than Lake Wylie, a suburb of Charlotte, North Carolina. Its population has tripled since 2000, largely due to an influx of out-of-state residents, reported Valerie Bauerlein for The Wall Street Journal. The move increased traffic, caused water systems to fail, and overfilled schools, and the county council's response was to impose a 16-month ban on new construction.

Low mortgage rates aren't the (only) solution

The continuous increase in housing prices and its negative effects shows that America's housing problem can't be entirely solved with lower mortgage rates.

"While lower interest rates are temporarily helping affordability, we can't expect this to remain at a low level forever," Yun said. He envisions mortgage rates remaining mostly under 4% this year, but said that in five years, they could be "miserably higher."

"This means that home prices need to be more manageable in the future and there needs to be an increase in supply and more construction to take place," he added.

It all ties back to the lack of starter homes, which Tucker considers the biggest challenge millennials will face as they try to move into homeownership. The majority of newly constructed homes in 2019 cost $500,000 or more. And in 2018, starter homes - those priced in the bottom third of the market - represented just 20.9% of available housing inventory in the US.

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America needs more starter homes on the market, experts say.

Real-estate investors are only making the problem worse. In 2018, they bought roughly 20% of US starter homes - twice as many as they did 20 years ago, reported Ben Casselman and Conor Dougherty for The New York Times.

The other problem for millennials is that lower mortgage rates only help if they can afford a down payment on a home in the first place - something they struggle with saving for because they've dealt with higher rent payments and more student loan debt than previous generations, Tucker said.

There's also the competition they'll face with their parents. As Tucker puts it, "The tricky thing for the next 10 years is that millennials and baby boomers will all be trying to be homeowners at the same time, which is going to make the housing crunch more difficult."

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