Friday, February 12, 2016

"Is a single-family home the new luxury item?"


CNBC asked that question in a recent article.  Here's an excerpt.

As finances and bad credit prevents homeownership for many, a single-family home may soon be considered a luxury item.

Almost half of those people who don't own a home said their financial situation is standing in the way, according to a report by Bankrate.com released Tuesday. Additionally, 29 percent said they can't afford a down payment and 16 percent said their credit isn't good enough to qualify for a mortgage.

. . .

These days, first-time homebuyers, who are primarily in their 30s, are spending a bigger chunk of their incomes to buy their first house — coughing up about 2.6 times their annual pay; in the 1970s, first-time homebuyers purchased homes that cost only about 1.7 times their yearly salary, according to Zillow.

Tighter lending standards and hefty down payments have further deterred some buyers.

. . .

As a result, rental occupancy is at the highest level in 30 years and homeownership, which peaked in 2005, is at the lowest level in half a century.

Millennials, more than those in other generations, were most likely to say they don't want to own a home right now. Because of their hefty financial obligations, such as student debt, they are also postponing getting married and starting a family, according to a separate survey by TD Ameritrade, which polled 1,000 adults age 18 and older.

Forty-eight percent of those polled said their financial constraints prompted them to delay buying a house, while 38 percent said they put off having children and 29 percent said they postponed getting married.

There's more at the link.  It's very worthwhile reading.

I think there are several contributory elements that CNBC hasn't factored into its analysis.  They include (but are not limited to):

  • The dearth of well-paying jobs.  Most of the new jobs created since the last recession of 2008/09 have been in the service industry, at hourly rates well below what many were previously earning.  I've read of people who used to earn the equivalent of $50-$100 per hour who are now making $10-$20 per hour in relatively menial jobs, because they simply can't find employment in their old industries and occupations at their old income levels.  If they don't have the income, they can't afford the homes they'd previously have bought.
  • The growth of other demands on income.  Medical insurance rates are just plain ruinous at present (due, of course, to the ridiculously high prices of US medical care compared to other nations).  Insurance for a couple is likely to cost at least $800-$1,000 per month for anything worthwhile, if they aren't eligible for Obamacare subsidies.  Student loans have also exploded in size and number, with many graduates leaving college or university carrying tens of thousands of dollars in debt.  With those repayments hanging over their earning ability, they often don't have sufficient disposable income to qualify for a mortgage.
  • The high prices of houses and apartments in most markets.  This is largely due to the surge in asset prices following multiple rounds of quantitative easing - all that cash had to find a home, and it found it in (among other things) property.  Investors have bought most of the forced-sale homes that came on the market as a result of the previous recession (click on these five links for more information), and they're not prepared to sell them at less than a very substantial profit.  Instead, they're renting them out, often at rates that appear extortionate compared to figures from only a few years previously.  This gives them a much higher, much safer return on their investment than they could get from the (currently dangerously unstable) stock and bond markets.  (As an example of how high rentals have become, Miss D. and I are paying approximately the same each month to own our new home, including mortgage principal and interest, insurance, rates and taxes, as we paid in Nashville to rent a duplex a little more than half as large and a lot less comfortable.)
  • The increase in the tax burden on individuals.  Thanks to Obamacare, tax rates went up this year by about 10%.  Obamacare itself imposes tax penalties on individuals who have non-qualifying (or no) medical insurance policies.  States and municipalities are increasing consumption taxes, fees and other levies to compensate for falling income levels, because they daren't cut services too far for fear that the electorate will vote those responsible out of office.
  • Inflation is costing people more and more for the basic necessities of life.  As we've discussed here before (most recently earlier this month), the real inflation rate affecting consumers in many US cities is probably a whole lot higher (by five to ten times) than the official government figure.  Families simply don't have enough disposable income to assume a heavier debt burden, even if it's a mortgage on a lasting asset.

There's another factor that I can't quantify for the country as a whole, but I can see its impact in individuals and families I know.  That's how they prioritize their financial needs.  To give you an example:  when Miss D. and I married six years ago, we decided to adopt a fairly simple lifestyle in order to live within our means.  As part of that, we gave absolute priority to paying off our respective debts, and secondarily tried to build up an emergency reserve.  After our debt load had been reduced as far as possible (with the exception of one consolidated long-term study loan at a very low interest rate), we didn't start spending a lot more;  instead, we saved more, so as to have a year's expenditure in the bank in case of need.  That's what enabled us to buy our new home when the opportunity arose.  We were able to put down a full 20% deposit and take a 15-year loan, instead of having to look for sub-prime finance.  We also made sure to buy a home we could afford, without over-extending ourselves.  As a result, our home-buying experience was relatively pain-free in financial terms (at least, so far).

I see far too many individuals and couples who aren't doing that.  Instead of being willing to live within their means and pay down existing debt, they continue to spend without any discipline.  They cite social pressures ("keeping up with the Joneses", as it used to be called), or the need to live up to their positions at work, or whatever;  but the fact remains that they're accumulating more and more and more debt.  They'll never be out of debt unless they change their ways, but they're not willing to do that, because it would mean the end of 'instant gratification'.  (Of course, business and commerce encourage the latter.  Can't afford to buy a car?  Why not lease one at a much lower monthly payment - and lease a better one than you could otherwise afford, while you're at it?  The fact that you'll never actually own a vehicle that way is neither here nor there . . . just as long as you can pay the lease every month.)

I suggest that these and other factors have a lot to do with why a lot fewer people are buying houses, apartments and condos these days.  If that's the case, it doesn't bode well for the economy as a whole, never mind the housing market.  It's yet another harbinger of what's bearing down on us.

Peter

13 comments:

Anonymous said...

The location of housing pricing has a large influence. One of my coworkers moved here (south Texas) from Park City Utah, where their aged 'shotgun' floor plan home cost a mint. After selling it, the price was able to afford them a very nice home down here.

Of course, moving the opposite (low to high cost) would likely raise goose pimples on a mummy . . .

Very interesting topic - thanks for bringing it up.

Javahead said...

Prices in high-demand areas have gone up considerably faster than the country at large, too.

We live in San Jose, CA, and in the 30+ years we've been here prices have gone from "higher than average" to "absolutely insane" - the median home price for 2015 was ~$800K, while the median income was ~$77K. That's right: the median home price for the area is >10x the median income.

As a junior engineer with just a few years experience back in 1988, our first house cost us <3x our annual income (both working).

That starter home today would cost 6-7x an entry level engineer's salary, already higher than the median family income for the area. For a modest house on a small lot in a middle class neighborhood. And the monthly *rent* for houses in this area is as high or higher than monthly mortgage payments would be.

This area is full of paper millionaires living middle-class lifestyles, if you count their home equity. Money that would otherwise go into college funds or retirement savings goes into paying the mortgage and property taxes instead.

Most homeowners we know bought years ago, and when the time comes they plan to sell and retire elsewhere. If the housing bubble bursts - again - before then, long-term owners will still probably be in the black. But anyone who's bought in the last 2-3 years risks losing everything, with losses as bad as the 2007-8 real estate slump. Yet sales are still brisk.

drjim said...

We're going to be moving from Southern California in a year or so after my wife retires.

We've been paying extra on our mortgage, and have paid it down quite a bit. Our house is a modest 3 bedroom, ONE bath house on an average size lot for this area.

It recently appraised at $480k! I was stunned.

*IF* the market holds together, we'll walk away with almost enough cash in hand to pay for our new place in Colorado.

And we'll both be very happy to escape the asylum that The People's Republik of Kaliforniastan has become....

deborah harvey said...

we are finding that medicare this year is cutting back on paying docs. haven't been in hospital yet, though that is coming.
all sorts of upping prices on groceries, too.
very hard to get out of debt and we are desperate to do so.

B5K said...

I recently took a new job out of state, and my hourly equivalent pay rate jumped up nearly $17/hour. Wife wanted to buy stuff but I forced the decision...We live at the same standard, and all money over my old salary rate splits between savings and secure investments (gold, silver brass and lead). We have no credit cards and no monthly bills beyond phones, internet and rent (we do not want to buy where I am working now; saving that for a certain region in the Rocky Mountain states).

One of my equally-new coworkers splurged his first paycheck and bought a new TV, surround sound system and is now pricing a new $80k luxury SUV. Some never learn...

Gorges Smythe said...

The goal has long been to eliminate private ownership and force us all into apartments.

kamas716 said...

The rental price issue isn't a new phenomenon, at least not around here. My wife and I bought our house in '05 as rents continued to rise. With nearly nothing down our mortgage, including taxes, insurance, etc., for our 3-bed/2-Bath with double garage in a little cul de sac was less than the 3/2 apartments in the area. We refinanced a couple of years ago and now our payment is a little over half what those apartments are going for, and we get a nice little yard for the dog and kid to play in.

Will said...

drjim:

you might want to consider selling your house now, instead of waiting until you NEED to sell. Rent for a year. Consider renting your current house, if you can sell it to an investor. Meanwhile, you can be looking for the retirement house, which you may need to buy before a year elapses, for the rollover tax situation. If the economy tanks in that timeframe, you'll be a lot happier.
I wouldn't leave the house money sitting in just one account, though. If the .gov decides to scalp bank accounts, you might loose a big chunk of it. That could be a second whammy of the downturn. YMMV. Consult with a tax expert for clarification, and perhaps some real estate pros in both locations. Don't assume expertise in one location translates to the other, as R.E. knowledge tends to be somewhat local.

Inconsiderate Bastard said...

What Will said.

If you're planning on relocating within 24 months, SELL NOW and rent. Housing prices are up everywhere - probably where you're planning to move as well - but that may not be true next year. Or next month, for that matter.

There's nothing wrong with trading a year or two of abominable commute from much cheaper lodgings for the opportunity to reach your goal of perrmanent, independent living in a better location.

Peter said...

@drjim: I agree with Will and Inconsiderate Bastard above. If you're going to sell, in your shoes I'd do so now while the market is relatively stable. I don't expect it to remain that way for very much longer.

Ray said...

Definitely a sellers market right now.

Housing prices are high due to:

1. Low interest rates
2. Low supply. A lot of houses in the foreclosure process held back.
3. Change of laws to allow mass purchase of houses for rentals
4. Overseas money (China).
5. Psychology. Sellers who believe prices can only go up.
6. High stock prices, low dividends
7. Us is seen as a safe haven
8. Hot economy in Silicon Valley. Stock options.
9. Regulations that artificially limit new housing (Silicon Valley especially).
10. High rental demand that has resulted in huge rent inflation.
11. Flippers

In California the housing market is very cyclical. Goes high, and then down.

Dr housing bubble is a good read,

I have been astonished at the prices in la and Silicon Valley. There has been a gusher of money from China inflating the market. That may have slowed.

drjim said...

I talked to my wife about selling now and renting until she retires.

She brought up some very good points:

Rents in this area are about double what our current mortgage is.

It's hard to find a place that will rent to you if you have a dog, in our case a Pit Bull.

If something happened and we couldn't move, we'd have lost our nice little house.

Peter said...

@drjim: I understand her concerns. However, when it comes to money, I have a simple guideline. "A bird in the hand is worth two in the bush." With cash in hand, you can afford to rent something for a year or two, even if it's more expensive. You have the option of downsizing or storing your possessions and living in a nice RV, if necessary. Cash gives you flexibility - and at least some insurance against the vagaries of the markets.

If retirement is on the cards in three years or less, I wouldn't hesitate for a moment to sell now. If it's three to five years out, that's a toss-of-the-coin decision. If it's more than five years away, there may be advantages to staying put. It's your call.