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American Dream Is Least Affordable Since 2007
The last time owning a home was as financially burdensome for everyday Americans as it is today, the US property market was on the precipice of calamity.
I wish there was a way to say that without sounding so foreboding, but... alas.
According to Attom, a real estate data business, owning a "typical" American home now chews up more than 35% of the average national wage, the highest share since 2007.
The cost of ownership includes property taxes, insurance and, of course, a mortgage payment. A
No mention of land reform?
Far too many would be first time home buyers are oblivious to the fact that you don’t need to put 20% down to purchase a home. Will they get hit with big, bad, scary PMI (gasp!)? Yup. Will they still come out waaaay ahead compared to continuing to rent? Also yup. This is especially true in an environment of rapidly increasing home values since lenders’ LTV calculations take market appreciation into account when determining PMI requirements. Nobody does the math anymore.
Which is not to say the current state of the housing market isn’t a problem – it obviously is. Just calling out a financial literacy issue that I see often and that is also baked into Attom’s analysis (which I understand is not limited to first time home buyers). Happy Monday, everybody.
This is a good point, but there’s always the outside chance of a meaningful market correction. Obviously, the definition of “correction” is different for homes than it is for, say, equities. Homes aren’t going to plunge 35%. But if you put 10% down and you pay 30% more than you would’ve pre-pandemic and your home isn’t in a great location, that’s a pretty dicey spot to be in in the event a deep recession comes along. In a nightmare scenario where you lose a job and you have to sell your home within the first year or two… well, it’d be rough.
But you’re generally right. If a family was i) sure they’d be able to pay the mortgage regardless of economic conditions, ii) confident that the property can be refi’d at a much lower rate in a few years and iii) content to stay in that home for long enough that a hypothetical 5-7% swoon would be recouped, then yeah, buy. But as one reader remarked last week, America’s late-twentysomethings don’t generally check those boxes — and they’d anyway rather spend money on “experiences” and luxury items because “you only live once.”
Real estate values plunged 67% from their peak in 1929 to their low in 1932- per Harvard Business School article published in 2013. Read the article to see how long they stayed at the lows. Here’s the link:https://www.hbs.edu/faculty/Pages/item.aspx?num=41283#:~:text=During%20the%201920s%20prices%20reached,market%20between%201929%20and%201932.
The Depression can’t be an analogue. Otherwise you’d never buy anything. Even a haircut. Sure, it’s a bargain this week at 75 cents, but by next month you’ll be able to trade a cup of rice for a razor fade once your barber’s first child starves and he’s trying to keep the second one alive on boiled shoe leather.
I bought this house in 2006, moved to a new city for a job, expected a decline in prices but thought 5-10% and not long lasting. So I put just 5% down – they were doing that then, all over – figuring worst case I’d limit my losses in case I moved on from this city. This isn’t the most stable industry, after all.
Well, as we know the crash was much worse than that and lasted for a long time. I think the house was down 30% at one point. But had things turned pear-shaped and I needed to move on, the loss would have been 5%.
I never “moved on”, so never had to enjoy the benefits of non-recourse mortgages, but in general I think people should consider the merits of putting down as little as possible. You limit the worst case downside, maximize leverage, buy sooner. PMI eventually goes away.
I graduated college a few years ago and now live in one of the most expensive MSAs in the country. I’ve been putting all of my discretionary cashflow into stocks and renting because I’m earning a better return compared to buying a house (or I thought I was). Now I have a good amount saved up where I can make a 20% down payment, but it would cut into my brokerage account more than I want. There is no supply of starter homes because they are bought by extremely wealthy individuals or developers then demolished for cushy 5BR/4BA type houses. The monthly expense to owning a home would be a minimum $6,500/month as the new build townhomes are starting at $850k. Do you know of any websites for education on “doing the math” or any websites that offer intuitive calculators that will help do the math for you?
I feel like my case really isn’t the norm because a $6,500/month mortgage is insanely high, but I’m in the position where I can buy. Previously I thought it would be a net negative if I took money out of the market to own a home (and I still do). However, I’m open to reading up and educating myself further after reading your response, and John L’s response on the merits of a minimum down payment. Anything would be appreciated. Thanks!
No specific sources. Googling it should get you there. But I will note you can’t live, laugh, love in your brokerage account. Investing in a home isn’t a strictly financial endeavor like pounding cash into a trading account. But you’re young (that’s a compliment) so you might not value the non-financial considerations now the same way you will in a few years. My immediate advice is to tell (not ask) your company you’ll be working remotely going forward and take your big city salary to a mid-sized market. I know a lot of people who have done the same and come out ahead. Best of luck!
I definitely agree with the remote work in a mid-size market. I also know people who took advantage of this at my same company but they have really clamped down on that. They even rejected remote work for a couple bellwethers on my old team, letting them quietly quit until they found a new job without backfilling it. Unfortunately there are circumstances that have kept me in the area outside of work, even though I personally would pack up and leave for a market 2 hours south with nice 3BR/2BA (2,500sqft) homes that go for $350-$400k. I have leverage as my team is now small and they need professionals since new hires take over 1-2 years to be independent/competent. Already found a few good sources last night and can always talk to some real estate friends as well. Appreciate it!
Part of the problem is the securitization of single family homes. Recently a person who is a real estate pundit said wall street landlords own a 35 year supply of the housing market annual sales. While sales are at a historically low rate this would be more than an insignificant source of money locking people out of home ownership if true. I have not seen corroborating government data to validate this point.
These firms to my knowledge are using government finance vehicles to fund their business whilst contributing to the serfdom of the american worker.
made a typographical mistake above, 25 year supply was purported.
Definitely true that institutional investors are squeezing out individual buyers. This has been discussed here and in the media a fair bit. Some info here from a HUD publication:
https://www.huduser.gov/portal/periodicals/em/winter23/highlight1.html#title
“Institutional and other large corporate investors own an increasing share of single-family homes, taking properties off the market for individual homebuyers and putting upward pressure on home prices and rents.
Institutional investors have concentrated their purchases regionally (in the Sun Belt) and in particular neighborhoods (typically low-income, historically nonwhite and disinvested areas).
Federal, state, and local governments can combat the negative impacts of institutional investors, often in partnership with nonprofit and other social-purpose organizations that can purchase single-family homes for individual buyers or help those buyers purchase them directly.”