Would-be US homeowners have seen their buying power “significantly eroded” over the past two months.
The quote is from NAHB Chairman Alicia Huey, but you needn’t be any sort of industry expert (nor consult anyone who is) to come to that conclusion. You could just look at mortgage rates. Or, better yet, pick out a nice house, then do the math on the monthly payments.
As it turns out, that math suggests it’s never been more expensive to pay for a wooden box on a 30-year installment plan. Those payments are up almost 14% YoY, according to Redfin, and have nearly doubled in three years.
The median home in America will now run you in excess fo $2,600 per month. (If you liked it at $1,400, you’ll love it at $2,600!)
As noted here over the weekend, $2,600 is a relatively trivial sum for the most fortunate among us, but for everyday people, $1,000 is still a lot of money. And if I’m thinking about this correctly, $2,600 is nearly three times $1,000.
The most recent increase in monthly costs might’ve been the straw that broke the camel’s back for builder sentiment, which fell in August for the first time this year. Data out Monday showed it dropped again in September.
“The two-month decline in builder sentiment coincides with when mortgage rates jumped above 7%,” the NAHB’s Huey said. “And on the supply-side front, builders continue to grapple with shortages of construction workers, buildable lots and distribution transformers, which is further adding to housing affordability woes.”
In addition to the pernicious combination of record-high home prices and the highest mortgage rates in two decades, skyrocketing insurance costs are likely deterring buyers and knocking on into builder sentiment too. Insurance costs are rising dramatically due, in part anyway, to the perception that natural disasters are likely to be more frequent and more catastrophic going forward.
If you missed the Bloomberg article documenting the soaring cost of insurance in Florida published earlier this month, it’s worth a read. The annual cost of insuring mansions on Star Island in Miami, where the likes of Ken Griffin and Rick Ross (the rapper, not the real Rick Ross) have homes, is now as high as $620,000.
I know, I know: Gator tears. But it’s not just titans of finance and fake drug lords paying up. As Felipe Marques and Devon Pendleton wrote, “Ordinary Floridians [are] struggling to find affordable policies. In the past three years alone, rates in the Sunshine State have tripled.”
Take that 2630 and add in 150/mo for insurance and 500 (minimum) for taxes and you get a monthly payment of roughly $3300/mo. If a borrower wants to hold the payment to 30% of gross income, that will require and income of over $130k. Sounds about right. That’s on gross income, not net. If one is losing say 30% in deductions on that pay stub, then one will need right around $190k gross to make that $3300 monthly equal to 30% of one’s net pay. Ouch. No wonder there is sticker shock. If I had mortgaged my modest below average $450k house for 30 yr @ 7%, with my current taxes and insurance I’d be shoveling out $3665 a month. That’s obnoxious.
I bought an expensive home in 2023, not thrilled about it. Patiently awaiting the refinance.
Ah, rising insurance premiums. If an insurer can increase premiums +30% and keep risk exposure the same, that is a big increase in underwriting profitability. Higher yields are also boosting investment income. Yes, climate change is driving higher weather risk, but not at the rate of +30% a year, and you can lower coverage limits to hold exposure flat.