Americans’ cost of living remains a massive headache, even as recession fears fade

New York (CNN) — The long-rumored recession has been postponed – or perhaps cancelled altogether.

The soft-landing vibes are real. Inflation is cooling. The economy is growing at a shockingly strong pace. And unemployment hasn’t been this low for this long since the late 1960s.

And yet, hidden behind these boomy-economic indicators, a frustrating reality persists: Life is far too expensive for far too many.

From the historically unaffordable housing market and budget-breaking day care rates to high car prices, the United States has a cost of living problem many years in the making.

Parents of young children are making difficult choices to afford child care — or they’re opting to evade it by dropping out of the workforce altogether.

Parents are also struggling to buy bigger cars to haul around their growing families while simultaneously socking away some money in college savings plans.

For too many, the American Dream feels like an illusion.

‘There’s no way we can afford it’

Hana Husković knows firsthand how the high cost of living is hurting families. The 36-year-old is an economist at the Bureau of Labor Statistics in Atlanta, where she helps compile data that feeds the Producer Price Index, a gauge of wholesale inflation closely watched by Wall Street.

Hana and her wife Michelle, 29, rent an apartment in Peachtree Corners, Georgia. They dream of buying a home in nearby Decatur where there are good schools and many other LGBTQ+ families.

But the couple is not optimistic.

“I don’t know if we’ll ever be able to buy a home,” Hana said. “There’s no way we can afford it. It’s not just interest rates. It’s the closing costs and the down payment.”

Hana was born in Yugoslavia and fled as a refugee during the war. She lived in an underground bomb shelter for months before crossing into Italy and eventually receiving asylum to come to the United States.

“I came from such abject poverty, and I am so grateful because I know a paycheck will come every two weeks,” Hana said.

Her wife’s family is from Mexico and similarly came from humble beginnings.

The couple is losing faith that they’ll be able to move up the socioeconomic ladder.

“I deem us as being in lower-middle class – working class. And I don’t know if we’ll ever be able to get out of that,” Hana said.

Hana’s wife stays home to take care of their son because they can’t afford day care.

That’s a common problem.

Even as the inflation rate has cooled across the US economy, child care remains a sore spot for many families.

The weekly price of day care for a toddler surged 9% in 2023, according to Care.com, a marketplace for child care. The rate for infants spiked 13%. The already-expensive option of a nanny has also gotten more expensive.

‘It feels impossible’

Allison Powell knew it wouldn’t be easy to raise a family and buy a home. But she didn’t think it would be this hard.

The 31-year-old registered nurse in Oakland, California, has been dipping into savings just to get by. Her husband, Liam Kelly, quit his job as a police officer to take care of their 9-month-old daughter and avoid paying roughly $2,500 a month for day care.

“I feel like we’re going to be 50 by the time we buy a house,” Allison told CNN in a recent interview. “It feels impossible to live the American Dream like I watched my parents live in the ‘90s.”

As they struggle to buy a house of their own, the family and their dog live rent-free in a house in Livermore, a city east of San Francisco. But that’s only because Allison’s parents used a sizable chunk of their retirement savings to purchase the home. And that only happened after a massive bidding war for the property.

“There were 26 people trying to buy it at the same time as us. The only reason we got it is because my parents made an all-cash offer with their retirement,” said Allison, who eventually hopes to save up enough money to buy it from her parents.

The couple say they can’t even think about having a second child, purely because it wouldn’t be possible to make it work financially.

“I have full-on panic attacks about our financial situation. It seems impossible to get any of our financial goals ticked off our list,” Allison said.

Of course, Allison is hardly alone in feeling like the American Dream has been more difficult — and expensive — to attain than imagined.

Double whammy in housing

America’s affordability problem is most glaring in the housing market.

The one-two punch of high home prices and elevated mortgage rates caused by the Federal Reserve’s war on inflation has made the housing market historically unaffordable.

Housing is often the biggest expense for families. But in today’s market, housing is swallowing up an uncomfortably large chunk of family budgets.

As of December 2023, it took about 36% of the median household’s monthly income to cover the principal and interest payments on a median-priced home ($440,730), according to research from the Intercontinental Exchange.

This metric of housing affordability recently hit the highest level since 1984, though it has eased a bit as mortgages backed away after flirting with 8% in October. Still, at nearly 7%, mortgage rates remain elevated.

Of course, the affordability challenge varies greatly by market.

Not surprisingly, six of the 10 least affordable housing markets are located in California, where Allison and her family live.

Mortgage payments are gobbling up roughly two-thirds of median income in Los Angeles (68%) and San Diego (60%), according to ICE.

“The cost of living here just keeps on going up. But I’ll never leave, that’s the problem,” Allison said.

Other unaffordable markets by this metric include San Francisco (54%), Miami (49%) and Honolulu (48%).

On the other hand, housing is much more affordable in some markets in the Midwest and Rust Belt. Mortgage payments account for less than a quarter of median income in Des Moines, Iowa; Dayton, Ohio; Cleveland, Ohio and Scranton, Pennsylvania, according to ICE.

Empty-nesters trump Millennials

Against this backdrop, it should be no surprise that today’s homebuyers skew older than in the past. Many young people can’t afford to buy.

The age of the median homebuyer has surged by almost a decade since 2003 to 49 years old, according to the National Association of Realtors.

Of course, this shift also reflects the fact that people are getting married and having kids at a later age than in the past, not to mention the burden of student debt.

A record 70% of buyers last year did not have a child under the age of 18 in their home, according to the NAR. That’s a significant shift from 1985 when only 42% of homebuyers did not have a child under the age of 18.

In another quirk of the modern housing market, empty-nest Baby Boomers own twice as many large homes as Millennials with kids, according to a recent Redfin analysis of 2022 US Census Data. That’s despite the fact that Millennials slightly outnumber Baby Boomers.

Homeowners have 38 times more wealth than renters

The elusiveness of buying a home today is especially problematic because home ownership remains the main ticket to building generational wealth in America.

For those fortunate enough to already own a home, high prices have boosted their net worth.

That wealth can be tapped to improve their homes, pay for college or start a business.

Others, many of them younger Americans, are stuck on the outside looking in.

“If you’re already owning a home, this feels great. Home price gains have made your balance sheet stronger. That’s a great line of defense in case something goes wrong,” said Lotfi Karoui, chief credit analyst at Goldman Sachs. “The issue is the entry barrier for new buyers has rarely been as high as today.”

And this situation is widening the divide between the haves and have-nots.

The median net worth of a homeowner in 2022 stood at $396,500 — about 38 times that of the net worth of the typical renter, according to the Federal Reserve.

That’s up from 1992, when the net worth of a homeowner was 30 times that of a renter.

“The American dream is being taken away from the younger generation by the housing affordability challenges,” said Lawrence Yun, chief economist at the National Association of Realtors.

Yun cautioned the Federal Reserve against attacking inflation so aggressively that it does unwarranted damage elsewhere.

“The Fed needs to understand that we cannot continue to create a social divide of winners and losers. It could lead to social instability,” he said.

Sub-6% mortgage rates on the way?

Priscilla Almodovar, the CEO of government-controlled mortgage giant Fannie Mae, concedes that in many ways this housing market is “unaffordable” — but she stressed this will pass.

“This is a moment in time,” Almodovar told CNN. “The American Dream is still alive and very possible.”

Fannie Mae is projecting the average rate for a 30-year fixed-rate mortgage will end the year below 6% as the Fed begins to cut interest rates. Although that’s still nearly twice as high as the level two years ago, it would help ease the affordability problem.

In the meantime, Almodovar said Fannie Mae is taking steps designed to help prospective buyers who haven’t built up a credit score yet or who can’t afford a 20% down payment.

The mortgage giant also recently announced a plan to save homebuyers around $1,000 on closing costs by supporting an alternative to title insurance.

All-cash bidding wars

Still, the biggest problem in the housing market isn’t closing costs. It’s the lack of supply.

There simply aren’t nearly enough homes on the market to meet demand. That’s why, despite elevated mortgage rates, there are all-cash bidding wars and countless offers on some homes.

Part of the supply challenge is that people who might want to sell are locked into historically low mortgage rates. If they sold now and got a mortgage for a new home, they’d be forced to pay sharply higher rates.

But this problem also predates the post-Covid inflation spike. Many homebuilders were scarred by the Great Recession, when a glut of homes on the market crashed prices. Homebuilding has never recovered from the subprime meltdown.

“This affordability crisis has been in the works since the financial crisis. Affordability will remain an issue until we get more housing supply,” said Mark Zandi, chief economist at Moody’s Analytics.

Even the White House acknowledges the United States has an affordability problem, especially on the housing front.

“This is a theme that has been front and center for President Biden for many years,” Lael Brainard, director of the White House National Economic Council, told CNN during a December conference call with reporters.

Brainard argued the Biden administration has taken “very strong action to create a much more inclusive path to the middle class,” pointing to $24 billion in subsidies to child care providers through the American Rescue Plan, fighting for the enhanced childcare tax credit and pushing for affordable housing tax credits and a down payment assistance program.

“Many of the programs the president has either secured or is really pushing for address those affordability challenges that make the middle class seem out of reach for too many Americans,” Brainard said.

‘Swallowed by that forever’

Even some of those lucky enough to have bought a home in recent years are now stressing out about how to pay for it.

After living with parents rent-free to save enough money, Rachael Gambino and her husband Garrett Mazzeo bought their first home in June 2022 in Lansdale, Pennsylvania, about 45 minutes outside of Philadelphia. To save up for a down payment, the couple moved in with parents to live rent-free for a period of time. At one point, they even lived separately to save up.

Rachael, a 33-year-old nonprofit manager, said the $3,400-a-month mortgage payment is proving to be a huge expense, especially on top of raising their eight-month-old son, paying for a bigger car and socking away money in a 529 college savings plan.

“It feels like we’re going to be swallowed by that forever,” Rachael said of the mortgage payment.

Rachael conceded that as a homeowner, in some ways she is living the American Dream.

“But at what cost?” she asked. “My husband and I spend a lot of time stressed trying to make ends meet.”

And Rachael fears she won’t be able to give her son as much as she had growing up, including playing multiple sports.

“Even swim lessons are outrageously expensive,” she said.

Rachael said they’ve tried to save money by cutting back on trips to Target and Starbucks and forgoing daycare in favor of a nanny found on Facebook.

“My husband and I fear we may never be able to have a second child – not because we can’t conceive, but because we can’t afford one,” she said.

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