REAL ESTATE
Affordability
As discussed in Chapter 7 of our publication When to Buy and When to Sell: Combining Easy Indicators, Charts, and Financial Astrology, and our previous Real Estate blogs, the purchase of a home may be one of the biggest decisions to make in one’s lifetime. For first time buyers, which are usually in their late 20’s to early 30’s, the process can be very harrowing and nerve-wracking. Investment properties have now become very challenging as well, with potential “rent freezes” and new system regulations.
As also noted in our publication and blogs, recent housing market conditions have not favored the buyer, but may finally be starting to change. Residential housing prices have started moving slightly downward in many locations, as inventories have started to rise. Although some “bidding wars” continue for certain desirable homes and locations, the fierce competition has cooled, in some areas, due to a percentage of buyers being “priced out” of homes, and/or simply waiting for better value, creating much less demand. Conditions continue to favor “all cash” buyers, as they are unaffected by the interest rates, although mortgage rates have started to decline. The fact that the increase in homes prices have also outpaced personal wages by 3-5 times does not help.
In last month’s edition we mentioned that one main reason for the increase in inventories, unfortunately, was the surging number of mortgage loan defaults over the past several months, which continues to be the case. We also introduced a possible alternative route with an assumable mortgage, and warned against predatory programs including the “zombie” or “piggyback” (80/20) loans. This month we will focus on actual affordability regarding the purchase of a home, and some parameters to follow.
As noted, a strange condition has recently emerged in the mortgage industry, as mortgage rates have fallen anywhere from 1-1.5%, down to the mid to low 6% range, despite the fact the Federal Reserve has not yet lowered the prime lending rate. A rate cut by the Fed has been “expected” since the beginning of the year, but mortgage rates have only decreased recently, which makes the mortgage rate decline even more confusing.
Purchasing a home has consistently become less affordable in the past 3-4 years, due to a “doubling” of homes prices in many areas, record credit card debt among consumers (which negatively effects credit scores and debt-to-value ratios), rising rents, insurance, property taxes, home and car maintenance costs, as well as inflation concerning everyday needs (including food, energy, and other necessities). It is no different for investment property owners/landlords, who now face “rent and eviction freezes,” new system regulations, and increases in insurance and property tax costs.
Purchasing a home has now become much more than just the “American Dream,” a nice tax write-off, and something to call your own, as the cost has become astronomical. There is also talk of some “rent controls” and other programs to assist young/first time buyers, however there is a risk of further inflation with other issues that this may cause. If these programs increase home prices further, re-appraisals and higher property taxes are likely to follow.
One of the main parameters used by lenders to qualify a potential buyer includes the loan-to-value of the desired property (which will determine if there will be any instant equity in the home), combined with the loan-to-income ratio for the buyer (which may also assist in the amount of down payment required). This formula is used to determine the perceived ability of the borrower to pay back the loan in the set time. Most mortgages are approved when the applicant(s) is able to commit 28 – 36% of their income toward their loan, after calculating other total monthly payments/obligations (car loans, credit limits, etc…). Some lenders have extended that figure to 43%, which is a dangerous level, especially for younger buyers. This figure only accounts for mortgage, taxes, and insurance, and does NOT factor in potential rises in costs in property taxes, utilities, repairs, loss of business/job, or higher credit balances from further spending, and overall higher inflation. Debt can easily snowball for borrowers, some of which is out of their control, and lack of affordability has led to the above mentioned rising number of defaults.
As previously discussed, buyers who plan to settle into a single-family home for decades, and have sufficient down payments, should pay more attention to the price of the home (which will never change), the property taxes, and home owner’s insurance (which have recently increased as noted), rather than just the interest rate (which often changes). Homes can always be refinanced when/if interest rates decline. There are also ways to pay down a mortgage quicker to save interest in the long run. A buyer should also make sure they have about 6 months in savings remaining (after the purchase) to cover the mortgage and expenses in the event of an unforeseen emergency.
Current conditions continue to be challenging for those who desire a “starter” home, or are only looking for a short-term purchase. Always confer with your financial advisor and an experienced agent prior to making this important decision.
8-23-24 Addendum – Since we posted this blog on August 16, there have been some additional developments in the past week, that we felt should be announced prior to next month’s Real Estate edition. Data reporting has become somewhat suspect in the real estate industry, similar to the overall economic data we often receive. Revisions to initial findings have also become common (usually worse than the original report), without mainstream coverage. Having said that, recent figures from some leading real estate internet companies have indicated that “buyers are back” or “more buyers are searching for homes.” Be aware of the locations you may be considering as a buyer, as these numbers are selectively interpreted, as some only reflect the previously mentioned defaults or forced sales. An increase in supply or “listings” may simply be a result of these noted defaults.
There are more important sets of data which include “Days on Market,” “Price Reductions,” and “Median Sales Prices” that tell a more accurate story. These categories have all been revised to the negative in most areas this past week. There are also some deceptive practices discussed in our publication, and previous blogs, to be aware of. Continue to be diligent with your agent to uncover all possible false, incomplete, or updated information before signing on the dotted line.
Please visit the website www.augustassociatesllc.com for home values, listings, and professional assistance.
