Frustration Grows As Americans Need $115K Salary To Afford Homes
The highest mortgage rates in decades continued to weigh on US builder sentiment in October, an update released on Tuesday showed.
The NAHB's gauge dropped to just 40 this month, the lowest since January. It was the third straight monthly decline.
Recall that sentiment fell every month in 2022 as the Fed ratcheted up rates. Rising financing costs alongside record prices made for a challenging juxtaposition for would-be buyers.
Sentiment rebounded this year and rose every month through July
You need close to that to live in your car and pay for maint, insurance and payments…..see https://www.nytimes.com/2023/10/17/realestate/car-homeless-rent-debt-mortgage.html
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Misleading. Most of that person’s income is going to accumulated debt.
Sure, psychologically, owning a home is nice. However, owning a home doesn’t guarantee a “good” life. And being in too much debt/overspending on housing is definitely one of the most stressful situations one can put themselves into. After factoring in real estate taxes, HOA, repairs/costs of ownership- it is much cheaper to rent than buy an equivalent space. I wouldn’t want to rely on appreciation going forward.
If increasing home ownership was a goal of the government, Impact/regulatory fees (which are about 25% of the cost of a new home) could be reduced. There is also a class action lawsuit about ready to go to trial against the National real estate brokers- who won’t list a house for sale on the national database without a seller agreeing to pay a 6% commission. In other developed countries, that percentage is 1.5%.
Reduce those two costs, and affordability can increase.
I did read that LA is considering allowing any religious/non-profit institutions to build affordable housing on any spare land that they own in Los Angeles with minimal regulatory fees/oversight. Given that the Mormon and Catholic churches are 2 of the largest landowners in the US- they should, between the 2 of them, be able to house the homeless.
I have my doubts.
Yeah, frankly, if I were advising (informally, I mean, not as a financial advisor) a 30-year-old with $100,000 in cash, a good-paying job and a lot of extra (i.e., investable) monthly income, I’m not entirely sure I would recommend taking the plunge on a $500,000 home right now if it meant tying up that $100,000 and tying them to a serious, long-term obligation which, as you say, comes with other financial obligations on top of the mortgage. HOA fees for nice condos in big cities can easily add $700/month, which is material for someone not making, you know, $250k or so. That hypothetical 30-year-old goes from being “up” $100,000 with plenty of monthly income and no worries, to illiquid and worried overnight with that home purchase. And those worries won’t start to fade until that home equity cushion gets big enough to where a market correction won’t negate it. If a hot water heater, the central heat/air or the roof needs replacing in the meantime, there goes a few months of disposable income.
That same 30-year-old could rent someplace pretty nice for the same $3,000 they’d pay on the mortgage (as long as they’re not in a really expensive city) and that $3,000 would actually only be ~$2,550 because they’d be making ~$450/month in free money in a money market fund on that $100,000. So, such a person could actually shop for a $3,500 rent and get a really cool place for $3,000 (again factoring in the free money from the MMF) and just sit around and wait until the buy-versus-rent calculation reverts to something more normal (i.e., where buying is more attractive than renting), which it eventually will.
Of course, all of my pontificating is predicated on no spouse or significant other and no children, which is probably not a safe assumption for most people. All I’m saying is that this is not a good time for young people to be plowing everything they have into a home purchase. Rates are high, prices are high, the cost of every damn thing (e.g., repairs, insurance and on and on) is high, and if you have no experience being illiquid (which I call “well-off in theory”), let me just say that it can be stressful until you get used to it.
The caveat, of course, is that rent is everywhere and always tantamount to setting money on fire, so there’s that. But from an experiential perspective, what you’re going to get right now, in this market, for a $3,000 mortgage payment is going to be a very, very mediocre house and that’s if you’re in a reasonably priced city. Nobody is going to be like, “Yay! I can’t wait to get home to my very, very mediocre house.” The fact that you own it might even be insult to psychological injury: “Dammit. I own this piece of sh–.” Whereas, you know, if you’re 30 years old, you’ve got your whole life ahead of you, presumably some friends you want to have over, and some parties you want to have, and so on, and if you’re in that same reasonably priced city and you can spend $3,500 on rent, you can probably get something you’re gonna be genuinely excited to go home to after work. You won’t own it. And you’re going to burn up a lot of money renting it. But if you buy an overpriced house and the market corrects 10%, you’ll be looking at a paper loss that’s about the same size….
To reiterate: All of that depends entirely on where you live. If you’re in an expensive city and you don’t have ~$6,000 for a mortgage or rent, you’re out of luck when it comes to getting something objectively nice.
Yeah, things are not great for families either. $500k in my town gets you a studio, maybe one bedroom. My 3 generation family needs at least 1600 Sq Ft to feel reasonably not on top of each other. A house/condo that size is at least $1.5 million. We debate “moving somewhere we can afford a house” conversation a lot. The loss of quality of life (likely the most subjective element of any housing calculation) with such a move would not be worth it for us. So we pay rent for a pretty good place with access to public transport only 3 stops away from where we would want to live. Affordability is out of whack for everyone.
FYI- monthly expense for the $1.5M home? Over $7k/mo
Financed my first home in 1988 at 9.00%, 15 year loan. Paid it off in 3 years rather than invest in the markets. Still consider it a good decision, and I hope younger folks taking on a mortgage will likewise consider their payment options.
I looked at this from 1971-current. Take median house price and mortgage rate, calculate debt service, divide by 0.3 to estimate required income, compare to median family income and to ratio median price/median income. Data from FRED; added most recent qtrs’ numbers, assumed 2023 median family income +2% from 2022. You could add other homeowner costs (insurance, maintenance, property tax) to debt service, would change numbers slightly.
From 4/1971 to 10/1981
– mortgage rate rose from 7.4% to 17.7%
– median price rose from $25,800 to $70,400
– ratio median price/median income rose from 2.5X to 3.1X
– required income rose from $5,724 (below median income $10,290) to $33,466 (above median income $22,390)
– ratio req’d income/median income rose from 0.6X to 1.5X
– spread mtg rate to 10Y UST yield rose from 116bp to 362bp
Yes, in 1981 the income required to buy a median-priced house was higher than median income, by a lot.
From 10/1981 to 10/2020
– mortgage rate declined from 17.7% to 2.76%
– median price rose from $70,400 to $358,700
– ratio median price/median income rose from 3.1X to 4.3X
– required income rose from $33,466 to $46,925
– ratio req’d income/median income declined from 1.5X to 0.6X
– spread mtg rate to 10Y UST yield fell from 362bp to 190bp
By 2020 the income required to buy a median-priced house was lower than median income, by a lot.
From 10/2020 to 10/2023
– mortgage rate rose from 2.76% to 7.89%
– median price rose from $358,700 to $430,300 (note latter is -10% below 10/2022 peak)
– ratio median price/median income rose from 4.3X to 4.5X
– required income rose from $46,925 to $99,983
– ratio req’d income/median income rose from 0.6X to 1.1X
– spread mtg rate to 10Y UST yield rose from 190bp to 321bp
In three years the income required to buy a median-priced house has risen to exceed median income, slightly. The move of ratio req’d income/median income from 0.6X to 1.1X has been very fast.
John’s always got the numbers. Appreciate this.
Where from here?
Hypothetically, if 10Y -100bp and spread -100bp (so mtg rate -200bp), median income +1%, then ratio req’d income/median income would be 0.85X. That might be a “inflation vanquished/soft landing scenario”. If also median price -6%, then ratio w/b 0.80X. That might be a “mild recession/bumpy landing” scenario.
Or, hypothetically, if 10Y -150bp, spread -150bp, median income -2%, median price -6% (i.e. -16% from 10/2022 peak, similar to Housing Bust during GFC), ratio would be 0.74X. That might be a “bona fide recession/hard landing” scenario.
BTW, 0.80X is the average 1971-2023.
Several years ago, the push to deregulate zoning and building started in my city. Developers told housing activists and politicians, “eliminate density limits, open space requirements, minimum lot sizes, height and setback rules, parking, and all our housing problems will be solved”. They also told the politicians “psst, here is money”. Housing activists packed hearings clamoring “we can only afford $500/mo for rent, build affordable housing for us”.
I consulted my developer and architect friends and built a pro forma model. Enter lot price, building area, number of units, finance rate, cap rate, and the model tells you the minimum price or rent the new units will be offered at. The model showed that every conceivable new project would only be for those with incomes of 150% or 200% median family income or higher.
The cost of new construction was simply too high for any new development to be “affordable”.
Was, and still is.
Sure enough, all the deregulation to date here has resulted in no affordable housing, other than publicly-subsidized regulated-rent affordable housing projects. All the private developers did was build housing for affluent customers.
The situation is even worse now, which is why starts have dried up for even the “affluent housing”.
Are there any current viable solutions to solve renter affordability issues besides LIHTC developments? As you said private developments are already too capital intensive to provide affordable solutions. One cost saver is to build minimum amenity projects but that doesn’t seem to be in style with developers or politicians.
I think if you build housing or rehab old projects with the goal of providing the basics then that would be a good start for those in need. However, I’m not sure if that is financially feasible for private developers since their goal is to maximize profits. This seems like an area ripe for public/private partnerships.
For genuinely affordable housing (for households well below median income) I think the only development that works is publicly subsidized affordable housing.
I would like to see some small percentage of the huge flow of money through the real estate industry taxed to fund a lot more publicly subsidized housing. I once estimated the total dollar volume of RE transactions in my county, and figured what transaction tax would be required for a huge (manyfold) increase in subsidized housing development funding. I recall it wasn’t much, like a percent or two.
Good stuff John L.
Interesting that a percentage point or two transaction tax to solve affordable housing is on par with the National real estate brokers’ oligopolistic commission premium.