Typical homes are hugely expensive. And typical people aren’t especially well-off. You do the math.
Home values rose appreciably, but at a slightly slower pace in July, according to Tuesday’s updates on America’s key national price gauges.
The Case-Shiller 20-City index gained 5.9% YoY, slower than the prior month’s 6.5% gain. It was the 13th consecutive advance measured against the same period a year ago.
The figure above serves as a rather stark reminder: There was no “correction.” There were a few months during which the annual price gains stopped, but that was the extent of the “relief” for would-be buyers trying to make the math work.
Gains were led in July by the Big Apple! Prices in New York City rose almost 9%. Las Vegas was a close second with an 8.2% gain. (Why anyone would want to live in Vegas is beyond me. “This stunning four-bedroom offers easy access to all the daily debauchery your body can handle — and then some!”)
Brian Luke, serial “logger” of ski resorts, could barely hide his elation. “We have witnessed 14 consecutive record highs in our National Index,” S&P’s Head of Commodities, Real & Digital Assets beamed on Tuesday, adding that the S&P has scored 39 records this year, and gold 35. (Golf clap from America’s homeless.)
Luke described a double-edged sword for starter home buyers. The low-price tier has done well, good news for families who managed to get in the door, but not so much for those still trying. “The relative outperformance of low-price-tiered indices has both benefited first-time homebuyers as well as made it more difficult for those looking for a starter home,” Luke went on.
FHFA’s monthly update, also released on Tuesday, showed national prices rose 4.5% YoY, but just 0.1% MoM. “Gradually declining mortgage rates and relatively flat house prices may improve housing affordability,” Anju Vajja, Deputy Director for FHFA’s research division, mused. “May.”
Meanwhile, Redfin’s Lily Katz had good news and bad news. The good news is: The annual income needed to afford a typical US home with a 15% downpayment fell in August for the first time since the pandemic. That’s thanks to falling mortgage rates (since prices are still rising).
The bad news is, that annual income remains north of $115,000. And yes, you read that right: If you don’t make at least $115,000, you can’t afford even a typical home in today’s US housing market.
The figure above is from Katz’s piece. Note: At one point post-pandemic, the income required to afford the median-priced US home with a 15% downpayment rose 50% YoY. Try, if you can, to internalize that. And then think through the implications for families.
Katz spelled it out. “The average American household still can’t afford to buy a home,” she wrote, adding that “the typical household earns an estimated $83,853 per year, which is 27.4% less than the $115,454 they need.”
In other words: The typical American family would need to see their household income rise by almost a third to buy the typical US home without breaching the 30% “cost-burdened” threshold. As it stands, Katz went on, “a household on the median income would need to spend 41.3% of their earnings on housing to buy the median priced home.”
If you’re curious to know why this is just the way things are and why Kamala Harris’s plan to ameliorate the cost burden for parents trying to put a roof over their children’s heads, is a bad idea, read Howard Marks’s latest memo. In it, Marks patiently explains that all of this — unaffordable homes, unaffordable groceries and all the rest — is just Darwin at work. To intervene, Marks said this month, is to interfere with free markets and, ultimately, to impede natural selection. His message to most of you seemed to be as follows: You’re biologically inferior to someone like him. The disparity between his fortune and your financial circumstances proves it. He didn’t say that explicitly, of course. But I was surprised — stunned, actually — at just how close he appeared to come.
It isn’t just the cost of the home and the mortgage interest rates that are the problem. The last year that I lived in a suburb of a big city (north shore of Chicago- but still in Cook County) was in 2006. That year, when we sold that house, real estate taxes plus insurance were 1% of the sale price of the home. I just looked up that house on Zillow. The combined RET and insurance are 2% of the Z-estimate.
If someone has some savings and they want to create more wealth- the two obvious choices are 1. Buy a home and hope for appreciation in excess of carrying costs or 2. Rent and put the savings in SPY. It would be hard for me to not recommend choice 2.
This ties in nicely with the Marks piece H referenced. From the Marks piece with regards to high rents/ housing supply and demand imbalance-
“developers generally can’t make returns for building apartments that are competitive with the returns on other forms of investment”
Maybe other forms of investment are too attractive.
Howard’s latest is egregious, and betrays an almost laughable lack of self-awareness. Also, it’s time someone tells him the hard truth, which is this: “Howard, you can’t write. Not really. Yes, market folks love your memos, so by all means keep churning them out. But just so you know how they would read to people outside of our little bubble, the memos are just quilts of mainstream media quotes stitched together by terribly unimaginative metaphors, folk wisdom and your Rolodex of market platitudes, most of which are so exhausted by now that they can’t even stand up.”
Why does nobody seem to realize this but me? Maybe it’s because this — markets and macro — isn’t my natural habitat, so I don’t have any special reason to admire Howard.
I used to pretend he could write because I thought that’s what everyone wanted to hear (and it is what everyone wants to hear), but it’s not true.
The truth is, getting a notification for “The Memo” is like getting an email from your grandparents. Subject: “Dearest one: Shall We Repeal the Laws of Economics?” “I don’t know right now, papaw, but I’m busy as f–k. I’ll make a sticky note to get back to you about it next month, or at Thanksgiving, whichever comes first.”
Totally agree. Even aside from the writing itself, which is much less enjoyable than others 😉 it’s replete with straw men, half truths, and a total obfuscation of the broad market intervention which he enjoys in favor of maligning local and micro interventions for the sake of the lower class.
It should be embarrassing but somehow I doubt he feels any shame over it. Honestly he might not think about his missives much at all.
I mean don’t get me wrong, they’re enjoyable as far as patchwork essays written by billionaires go, but Jesus Christ if that’s not a low bar then I don’t know what is.
I think 10 year yield at 3.75% is about as low as it should get, assuming FF headed to 3.00% and some term premium. Mortgage-10Y spread is high at 225bp. QT for MBS may be keeping it high; more uncertainty, higher inflation risk, or privatizing FNM/FRE will likely move it higher. But suppose it declines to best-case 100bp, and thus mortgage rate to best-case 4.75%. That would be 15% lower payments from today’s 6.20% mortgage. But incomes are 30% below affordability?
“Market forces” are not going to solve this. Harris’ housing plan is a start: increasing Low-Income Housing Tax Credit, tax incentives for building starter homes for first-time buyers, downpayment assistance for first-timers, funding innovation in supply/construction, opening some federal land to affordable housing, dismantling institutional rental house fleets, blocking rent price-fixing via share algorithms.
Nothing wrong with living in Vegas. What wonderful city do you call home ?
There are several levers to help here. Most of them are supply. Density/zoning changes. Reducing friction and streamlining building and reducing nimby. Refining mass production techniques. Not specific to housing, but helping the bottom 50% of incomes standard of living via tax credits, safety net, and social goods such as child care and k-12 education. In finance coming up with a plan to allow mortgage companies to get an upside of a house for lending or part ownership in exchange for a much lower interest rate on the mortgage. That would make housing carrying costs more affordable for some and would share the risk.
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Landlords are getting into the game too.
As a renter, I have had steady yearly price increases for over 10 years, typically around 5% per year.
This year, the landlord (Sequoia properties, who own many apartment complexes) decided to outdo themselves. 9% increase this year. And my 10+ year old carpets aren’t getting any newer either.
I looked around and saw high rents in many other places.
Landlords know it is a hassle and expense to move, so they can raise renewal lease rents even if new lease rents are soft. Since the great majority of leases are renewed, rents overall can go up almost no matter what. I suspect there is software that predicts how far they can push renewal rent increases based on tenant specifics. E.g. I would guess that lower credit score, higher age, larger family size, location of school, location of work, month of lease expiration might all predict the tenant will swallow larger increases. Perhaps AI will make rent “optimization” even “better”. As part of its contribution to human well-being, natch.
“Perhaps AI will make rent “optimization” even “better”. As part of its contribution to human well-being, natch.” Ah, a use for AI which should justify the expense! “Hey, there’s still a bit of water left in that washcloth if you just know how to wring out every last bit.”
Meanwhile, rate payers and taxpayers are subsidizing the build-out of data centers which will benefit mega-tech. At their expense.