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Home Prices Log New Record; Downpayment Burden Worsens
Home prices rose less than anticipated in July.
Consensus expected S&P/Case-Shiller's 20-city index to post a 20% YoY gain in data out Tuesday. Instead, the gauge rose just 19.95%. Things are cooling off.
That's dry humor, of course.
The national gauge rose 19.7% for the month. That was up from 18.73% in June, and another "biggest gain since at least 1988" moment (figure below).
The numbers are hardly surprising. Although more recent data suggests the market might be slowly normalizing
It used to be a rule of thumb that house prices were at fair value at 3x income. Now look at it? It is like 8x in the US and 40x in Beijing, and speaking of China did I see that housing share of wealth is like 60% of assets, or 3x what it is in the US, although it is true that many in the US do not own houses and are renting. Nevertheless, dismissing the real estate threat in China seems a little naive.
All risk assets including housing is inflated by low interest rates. I would take the downpayment shock thing with a little grain of salt. FHA/VA , state housing lenders, or mortgages with PMI are available with lower downpayments. There is still an affordability situation for those in the bottom 2/3 of the income strata. Of course the bottom 40% probably should not own anyway. Their issue is high rents and a shortage of subsidized or public housing. GIven the tax structure now, many don’t have enough deductions to itemize so owning is not a great deal in most markets if you are low middle to lower income anyway. I do not want to dismiss the idea of owning is not a good thing on many levels- I own myself. But home ownership for many is not a be all and end all. For many, health care, education and simply an adequate level of income and resiliency to bad events is a much bigger issue. When the Fed did their study and a large part of America did not have 400 bucks to meet an “emergency” like having enough money to make a small car repair, you know that a large swath of the general public either lacks sufficient income or the financial literacy to manage their money effectively- or both.
FYI the standard deduction is $25,100 for married couples now I believe. That was what I was referring to about the tax structure.
40th percentile household income in the US is roughly $60K, I think. In “theory” that household can afford payments on up to a $400K mortgage at 30y 3.5%. $60K is two people making $18/hr for 40 hr/wk. This is if they manage their finances tightly, don’t have very bad luck, etc. Not easy. Not easy at all. But just possible.
I don’t have any big insight here. Just thinking that, while as investors we look at low-end jobs offering $18/hr and think “OMG labor shortage inflation margins multiples portfolio risk blah blah” . . . as people we should be cheering every time we see a sign advertising $18/hr.
Wage inflation is a good thing. Maybe not for investors, but for the people who are most in need of a goodness.
Okay, after that brief detour into humanity, putting the investor hat back on. “OMG labor shortage inflation blah blah . . .
$400k @3.5% is around $2400/mo including property taxes and insurance. Is it really possible to spend almost 50% of gross per month?