I’ve already written about it not being the best time to buy a home right now, at least from a pure investment standpoint.
In short, home prices are expensive relative to incomes, mortgage rates have more than doubled, and there’s little quality inventory.
And now we can quantify just how long it takes to break even on a house, per a new analysis from Zillow.
Hint: it’s a long, long time, even if you’re able to muster a big 20% down payment.
So if you’re thinking about buying a home today, prepare to stick around for the long-haul.
How Long to Break Even on a House These Days?
– 3% down payment: 13 years and six months to make a profit. – 5% down payment: 13 years and three months to make a profit. – 10% down payment: 12 years and seven months to make a profit. – 20% down payment: 11 years and three months to make a profit.
A new Zillow analysis tried to determine how long you’d need to own your home before you could sell it for a profit.
This factors in the closing costs associated with the home purchase, the mortgage interest paid, home maintenance costs, and the sales costs once it came time to list the property.
Specifically, they assume 3% closing costs at purchase, 1% home maintenance fees, and 6% in closing costs at the time of sale, along with all that mortgage interest.
In reality, it could be even higher. It’s not unusual for real estate agents to charge 5-6% of the sales price.
So if you’re putting down just 3%, you’re already in the hole, especially once you consider those closing costs as well.
To offset all those expenses, you need to make regular payments to principal each month and hope the property appreciates in value over the years as well.
The rule of thumb says it normally takes about 3-7 years to break even on a home purchase, with perhaps five years the average.
But that number has risen sharply lately thanks to a combination of sky-high asking prices and equally expensive mortgage rates.
How long you ask? Per Zillow, home buyers today can expect to spend approximately 13.5 years in their house before being able to sell at a profit!
In other words, you better really like your house unless you want to sell for a loss, or worse, be forced to do a short sale.
It Takes More Time to Turn a Profit in Affordable Housing Markets
And here’s the irony. It actually takes longer to turn a profit in more affordable housing markets.
Those purchasing a home in places like Cleveland, Baton Rouge, El Paso, Akron, or Indianapolis might need to wait at least 20 years to reach this crucial profit point.
As for why, it’s because of the slower historical growth rate in these more affordable areas.
Without home price appreciation doing most of the heavy lifting, it takes a lot more time to build home equity.
Simply put, principal payments are a lot less impactful than increases in property values, especially on a high-rate mortgage where most of the payment goes toward interest.
It’s the worst in Cleveland, where Zillow says it can take a whopping 22 years and 10 months to turn a profit.
Similar timelines can be seen in the other metros mentioned, meaning it’s not always advisable to buy a home just because it’s cheap.
There’s a Faster Road to Profit in Expensive Housing Markets
Again, while seemingly counterintuitive, it’s actually easier to turn a profit if you buy a home in an expensive metro.
Of course, the barrier to entry will likely be higher, but it’s one of those rich get richer stories.
For example, in notoriously expensive Bay Area metros such as San Jose or San Francisco, California, the break-even timeline to profit is a much shorter 7 to 7.5 years.
This is still a long time historically speaking, but it is considerably less than in those “cheap” housing markets.
Similar short purchase-to-sale profit timelines can be found in San Diego, Los Angeles, and Miami.
As you can see, these are highly-sought after cities where demand always tends to be strong, and supply always low. And because of that, home prices are often rising.
But there’s a big barrier to entry, whether it’s the high asking price or the large down payment required.
Either way, this data tells us it might not be the best time to purchase a home at the moment, even if you can muster a 20% down payment.
It could be advantageous to wait for a better combination of lower asking prices, cheaper mortgage rates, and better inventory.
Of course, there are reasons to buy a home other than for the investment. But you still need to be prepared to stick around for a while.
Read more: Pros and cons of renting vs. buying a home
When the housing market was searing hot, buyers faced intense competition — bidding wars, cash investors, and buy/sell decisions made on rapid deadlines. Now that real estate has cooled, there are fewer homes for sale, two-decade-high interest rates, and stubbornly elevated house values.
It’s rarely easy to buy a home. And if you can find a house you love, the question becomes: Is now a good time to buy?
The 2023 housing market
Looking for the perfect time to buy? Fewer than one in five consumers surveyed by Fannie Mae in July 2023 thought that it was a good time to buy a home. Yet, timing the housing market is more complicated than timing the stock market. Which is impossible. There are few “just right” Goldilocks real estate markets.
But you’re not buying the market. You’re buying a house in a city, neighborhood, and block where you want to live. Hopefully, for quite a while.
Mortgage rates
We all know this story. Interest rates have risen — and mortgage rates are no exception. The Federal Reserve has been raising short-term interest rates for well over a year in an effort to shrink inflation — the rise in consumer prices. Not only do the Fed’s rate increases immediately lift short-term mortgage rates such as variable-rate loans, but they also tend to influence long-term mortgage rates upwards as well eventually.
And though we don’t live in a 2%-3% world these days, mortgage rates are near their 52-year historical average.
Since April 1971, the 30-year mortgage rate has averaged 7.74%, based on data collected by Freddie Mac.
Of course, that’s little comfort to homebuyers today who remember when rates were under 3% for much of 2021. Conversely, the highest rate on record was a whopping 18.63% in October 1981.
According to Zillow research, the trend of mortgage rates — whether interest rates are generally rising or falling — may influence whether existing homeowners would consider selling their existing house to move into another. With so many existing homeowners paying a much lower mortgage rate, the study found it would take rates to fall somewhere to between 4% and 5% before they would sell the home they’re in and buy another.
This rate gridlock is contributing to the lack of existing homes for sale.
Take action: Consider the interest rate strategies below until (and if) mortgage rates fall significantly lower for an opportunity to refinance.
Home values
There is a little good news, though. Higher mortgage rates have softened the real estate market, and the increase in home prices is moderating.
The rise in existing home values is slowing. Home values are lower year-over-year in almost half (23) of the 50 largest metro areas, according to a Zillow analysis.
Take action: Look for homes with price reductions where you want to live. Then negotiate even harder.
But listings for existing homes are far fewer. For more than 12 months, new listings have been down year-over-year. The number of new listings of homes for sale is down more than 20% from pre-pandemic levels, according to Realtor.com.
Take action: Consider expanding your search to more affordable areas close to your favorite neighborhood if it’s too pricey.
New home inventory is rising. Construction of new homes is showing promise of growth, according to the U.S. Census Bureau. However, builders are still wary of oversupplying the market, concerned that consumer demand could sag as potential buyers shy away from rising mortgage rates.
Take action: If you want to buy a house now, consider new construction. You may be able to choose some finishes or make an even better deal on a spec home that’s been on the market for a while.
When is a good time to buy a house?
Buying a home is more than considering macroeconomic factors. It’s an important life decision based on your personal and financial situation.
Where do you want to be in 5 years?
When you rent, the decision to move is broken down into six months, or a year or two at a time, as your lease renews. But every dollar-related detail makes a home purchase a medium- to long-term investment. Buying a house includes various costs: the down payment, closing costs, and financing fees, moving expenses, property taxes, and perhaps selling your existing place.
Homeownership requires a years-long timeline. How you make a living, your friends, family, and even community amenities all come into play.
Your income
A primary consideration: your job. Will it require a location change anytime soon, or can you live where you please? Is your income steady and all but assured?
Your credit score
One of the significant factors that will qualify you for a home loan is your credit score. It’s important to know it before applying for a mortgage.
For the most common loan, a conventional mortgage not backed by a government agency, you generally need a FICO score of 620 or better.
FHA loans can allow a credit score as low as 580 with 3.5% down. VA loans issued to qualified military service members and veterans don’t officially have a minimum credit score, though some lenders will require a FICO score of 620.
As a benchmark to where you stand, the median credit score on a new mortgage in the second quarter of 2023 was 769, according to the New York Federal Reserve.
Of course, minimum scores are the entry-level to qualifying; the higher your score, the better the loan terms you’ll be offered. Most importantly, that can mean you’ll pay a lower annual percentage rate over the life of the loan. You may also have more room to negotiate on fees.
Your current debt load
A primary financial metric lenders will use to determine your creditworthiness is your debt-to-income ratio.
Fannie Mae, a government-sponsored entity that provides liquidity to the home loan market, looks for a maximum total DTI ratio of 36% of “the borrower’s stable monthly income.” Exceptions can allow for total DTIs up to 50%, but it’s usually best to avoid working on the edges of qualification if you can.
You can calculate your DTI by dividing your total recurring monthly debt by your gross (before taxes and other deductions) monthly income.
Include debt such as monthly mortgage payments (or rent), real estate taxes, and homeowner’s insurance. Also, add any car payments, student loans, and the monthly minimum due on credit cards. Remember any personal loan payments and child support or alimony.
Do not include debt such as monthly utilities — like electricity, water, garbage, or gas bills — or car insurance, television streaming subscriptions, or cell phone bills. You can also exclude health insurance costs and miscellaneous expenses such as groceries or entertainment.
Your savings
Having a cash cushion in the form of emergency savings shows lenders that you are prepared for the unexpected. Of course, that savings account should also include …
Your down payment
A large chunk of your savings account should be dedicated to the down payment. A minimum of 3% down is required in order to qualify for a conventional loan targeted to first-time homebuyers — or ideally, 20% to avoid private mortgage insurance. Yes, zero-down options exist if you are eligible for a VA- or USDA-backed loan.
According to Realtor.com, the average down payment in the first quarter of 2023 was 13%.
4 rate-relief strategies to consider
Buying a house when interest rates are high can require some financial finesse to enhance affordability.
1. Buying discount points
Prepaying interest in order to lower your ongoing mortgage rate is called buying discount points. One point is equal to 1% of the loan amount. However, lenders sometimes add a point or two to a mortgage proposal to make their loan offer appear more enticing. But you’re actually paying for the discount with an upfront fee.
When shopping for a loan, compare loan offers with zero points. Then, you can decide whether to buy points to lower your interest rate. It is important to note that buying one point (paying 1% of the loan amount upfront) will generally reduce your interest rate by only one-quarter of a percentage point.
2. An interest rate buydown
Borrowers can lower their mortgage interest rate for the first few years at the beginning of the loan term with a buydown. Home builders, sellers, and some lenders sometimes offer an interest rate buydown to boost sales.
While you get a short-term break on the interest rate, your payments and total interest may actually be higher. It’s a strategy that requires running the numbers on the long-term benefits.
If you’re paying for the buydown, compare a mortgage both with and without a buydown. By the way, lenders will qualify you based on the permanent interest rate, not the temporary buydown rate.
3.An adjustable-rate mortgage
A mortgage product that increases in popularity whenever rates begin to rise is back: the adjustable-rate mortgage.
ARMs have a fixed interest rate for an introductory period, often five to 10 years, and then the rate changes regularly, usually once or twice a year. Tips when shopping for an ARM:
Look for an introductory rate that is lower than a fixed-rate mortgage.
Choose a term you feel comfortable with, perhaps in line with how long you plan to stay in the home.
Make sure you budget for possible increases in your monthly payment if the interest rate moves higher after the end of the introductory rate period.
4. A shorter-term mortgage
Are you more comfortable with an interest rate that never changes, even if your monthly payment is slightly higher than you’d like? Consider a shorter-term loan. Mortgages with 20- or 15-year fixed terms, as opposed to the traditional 30-year term, typically come with lower interest rates. The lower rate and shorter term combination means you’ll gain equity in your home faster, too.
Your next move
Buy smart and shop a lot. Relentlessly shop mortgage rates and lenders for the best loan offers and justified fees. Get a written preapproval from your lender, then shop for a house you can love and can afford. Your home buying competition is.
According to Zillow, when it comes to first-time buyers versus repeat buyers, first-timers are more likely to reach out to at least three lenders and three real estate agents.
Housing affordability across the country is especially tough in the nation’s urban areas, but in the country’s largest metros it’s often the suburbs that are the least affordable.
A new Zillow analysis examines the financial burden of housing payments in urban, suburban and rural parts of the country. Finding a home within their budget is the top concern for both renters and home buyers, according to the 2018 Zillow Group Report on Consumer Housing Trends, but where a home is located can affect that budget, forcing many to accept tradeoffs.
Urban home buyers nationwide have to dedicate a larger share of their income to monthly mortgage payments (26.5 percent) than buyers in the suburbs or rural areas do – 20.2 percent and 13.4 percent, respectively. In urban areas of the Seattle metro, for example, buyers would need to dedicate 40.4 percent of their income to monthly housing costs, more than they would have to in either the suburbs (27.4 percent) or rural areas (24.4 percent). The same hold true in less than a third of the country’s largest markets.
The suburbs are the most common destination for today’s home buyers, with 48 percent of all buyers purchasing a home in the suburbs. Yet suburban living is a bigger financial burden for buyers in nearly half of the country’s largest markets (17 of the top 35 metros), compared with the costs of urban or rural housing.
In San Diego, for example, paying for a suburban home requires 40.9 percent of the median household income. Mortgage payments on a rural home would take up 37.3 percent of the median income, and housing costs for an urban home would require 35 percent of the typical income.
“Choosing where to live depends on many factors other than strictly financial terms. The size and space of the home, and the nearby amenities have to meet your needs, or come as close as possible,” said Zillow Director of Economic Research and Outreach, Skylar Olsen. “How close you can come to those ideal options is always limited by what you can afford, and tradeoffs are almost always necessary. Finding a home in your budget can be a stressful process, whether you’re looking to buy or rent. The difference between an urban core or more distant suburb could make all the difference.”
Across the country, renters signing a new lease typically spend more of their income on monthly housing costs than homeowners do, in large part due to still-low interest rates for buyers. The difference between national affordability trends and what is happening in the 35 largest housing markets is more pronounced for renters.
Nationally, rental payments in an urban area require 36.8 percent of the median household income each month, well above the commonly recommended 30 percent. Suburban rents are also slightly above that threshold, requiring 31.8 percent of the median household income. Rural rents nationwide are the smallest financial burden, taking 23.9 percent of the typical income.
Urban rents in the Dallas market take up a much larger share of income than those in suburban or rural areas of the metro. The financial burden for urban renters exceeds the 30 percent standard, with the typical urban rent requiring 38.8 percent of the median income.
However, in about two-thirds of the biggest U.S. housing markets rents are least affordable in the suburbs, where rental supply is slow to grow. Renting a home in the suburbs of Chicago, for example, requires 30 percent of the median income, more than what would be required in either urban or rural parts of the metro.
Mike Wheatley is the senior editor at Realty Biz News. Got a real estate related news article you wish to share, contact Mike at [email protected].
Buyers’ monthly housing costs are growing rapidly as mortgage rates have risen significantly since the beginning of the year.
A recent Zillow analysis found that higher rates are responsible for about two-thirds of the increase in buyers’ monthly mortgage payments compared with what those costs would have been a year ago had home values remained constant at their current level.
Monthly mortgage payments for the typical home are 15.4 percent higher than they were in August 2017. The median home value is 6.5 percent higher over the past year. For someone buying the median U.S. home, their monthly mortgage payments are $118 higher, or $1,416 each year.
These higher mortgage payments reflect the combination of increased home values as well as the higher interest rates for buyers.
Since the beginning of the year, mortgage rates have climbed from the historic lows they were near for much of the past decade. The average mortgage rate at the beginning of the year was about 4 percent, and reached 4.9 percent in the last weeki. Incoming economic data increasingly point to a booming U.S. economy, and this strength is pushing rates higher. The Federal Reserve has raised the target federal funds rate three times so far this year, with as many as five more expected through the end of 2019. A one percentage point increase to the current rate translates to about $1,200 more per year in mortgage payments for the typical U.S. home at its current value, even if home prices stayed the sameii.
While mortgage rates have risen, home value appreciation has slowed somewhat, growing 6.5 percent annually in August after peaking at 8.2 percent in March 2018. These slower price gains may be seen as an advantage for buyers, but the rapid increase in mortgage rates work against the benefits of a slightly cooler market, as the mortgage payments themselves continue to climb.
“For most of the current economic expansion, mortgage rates have remained just off historic lows even as the American economy has accelerated,” said Zillow Senior Economist Aaron Terrazas. “We’re finally starting to see typical patterns asserting themselves in the housing market, and conditions are returning to more of what we would expect in a normal economy. Home buyers and sellers have become accustomed to low rates, and there will be a bit of an adjustment period as the market adapts. Looking ahead, the impact of higher rates may slow the pace of home value growth, particularly in the nation’s priciest markets. Buyers will face higher financing costs, but also could benefit from somewhat less frenetic competition.”
Buyers in San Jose, who also face the highest median home values, will see the biggest impact on their monthly mortgage costs from rising rates. Monthly mortgage payments on the typical home are $1,300 higher than they would have been a year ago, meaning buyers would be spending about $15,500 more every year – about 10 times larger than the nationwide increase.
Mike Wheatley is the senior editor at Realty Biz News. Got a real estate related news article you wish to share, contact Mike at [email protected].
With housing becoming more and more unaffordable in the U.S., a new Zillow analysis shows that residents in the capital, Washington D.C. have the most cash left over after paying their mortgage.
Zillow’s
study assumes the median annual gross income and mortgage payment for
each of the 35 largest housing markets in the U.S. Its data shows
that residents in the capital have almost $7,000 of their monthly
incomes left to spare after paying for their home. That compares to
second place San Jose, whose residents have on average, $6,800 after
paying their mortgage repayments.
At
the opposite end of the scale, residents of Los Angeles and Florida
struggle the most. In LA, homeowners there average $3,450 per month
left over, which is slightly less than those living in Miami, Tampa
Bay and Orlando. However, renters in those three Florida cities have
the smallest amount of leftover cash after paying their monthly rent.
Unfortunately
for LA residents, they’re left with even less when the substantial
income tax rates of California are taken into consideration. Those
taxes cut deep into whatever income is left over for other expenses,
such as food, transportation, child care and education costs.
“In
our quest for happiness, or at least satisfaction, we must accept
tradeoffs,” said Skylar Olsen, Zillow’s Director of Economic
Research. “A good-paying job with career growth potential often
comes with expensive housing, leaving less for life’s other
essentials such as taxes, child care, transportation, medical
services, food and leisure. Finding that balance where housing costs
leave a comfortable amount of spending money is tricky, especially
when the prices of life’s non-housing essentials also vary widely by
market.”
The
bad news for buyers is that affordability overall has worsened in the
last year due to rising interest rates and accelerating home value
appreciation over the last year. In November, the average 30-year
fixed rate mortgage had risen to 4.94 percent, up from 3.95 percent
at the start of the year. Fortunately, rates have now dipped slightly
to below 4.4 percent, while home value appreciation is finally
beginning to cool in many markets. That could lead to better
affordability in recent months, Zillow said.
Other
data from Zillow’s study shows that a mortgage payment on the
typical home in the U.S. required 17.5 percent of the median income
in Q4 2018. This is up from 15.4 percent in the last quarter of 2017
but still below the historic average of 21 percent from the late
1980s and 1990s. Using this traditional measure of housing
affordability, less expensive Midwest markets such as Pittsburgh, St.
Louis and Cincinnati top the list.
The
typical U.S. renter spent 27.7 percent of their income on rent
payments in 2018. This is down slightly from 28.1 percent in 2017,
but higher than the historic average of 25.8 percent. Rent payments
accounted for more than 30 percent of the median income in 13 large
U.S. metros, widely considered the standard for unaffordable housing
costs.
Mike Wheatley is the senior editor at Realty Biz News. Got a real estate related news article you wish to share, contact Mike at [email protected].
Millions of homeowners across the country lost their homes in the foreclosure crisis, missing out on the opportunity to regain and grow their net wealth as the housing market recovered. But in black and Hispanic communities, the foreclosure crisis hit especially hard, and homes in those areas have yet to fully recover, according to a new Zillow analysis.
When the housing market crashed, many homes lost a significant share of their value, especially among homes that were ultimately foreclosed. In Hispanic and black communities, foreclosed home values fell by more than 50 percent.
As the market recovered and home values rebounded, foreclosed homes saw strong appreciation –equity growth that the former owners couldn’t access. Foreclosed homes in black and Hispanic communities have more than doubled in value since reaching their lowest point, though they remain 4.7 percent and 9.5 percent below their peaks.
Not only did the foreclosure crisis have a sharper impact on people’s ability to gain wealth in black and Hispanic communities, it also had a broader reach into those areas. Nationally, 19.4 percent of all foreclosures between 2007 and 2015 were in Hispanic communities – but only 9.6 percent of homes are in those same areas. Similarly, 12.7 percent of foreclosures occurred in black communities, while 7.7 percent of all homes are in black communities.
In Atlanta, 30.5 percent of all homes are in black communities, but more than half of all foreclosed homes are in those communities. Just 44.2 percent of foreclosed Atlanta homes are in white communities, compared with the overall 65.1 percent of homes in white communities.
Losing a home to foreclosure is especially impactful for Hispanic and black homeowners, who historically have held the majority of their net worth in their homes. Near the height of the housing bubble in 2007, Hispanic and black homeowners had 73.1 percent and 61.8 percent of their net worth tied up in their homes. For white homeowners, that number was only 46.5 percent.
“The housing bust and foreclosure crisis that followed resulted in a disproportionate number of people of color losing not only the roof over their heads, but the wealth—and the opportunity to potentially build more—that came with it,” said Zillow Senior Economist Sarah Mikhitarian. “Black and Hispanic homeowners were more exposed to the foreclosure crisis because homes accounted for such a large share of their wealth. With fewer assets to draw on, it was harder for them to hold onto their homes if they fell underwater on their mortgages, owing more than their home was worth. For people who ultimately succumbed to foreclosure, they missed out on the opportunity to see their home’s equity—and therefore their wealth—climb back up.”
Mike Wheatley is the senior editor at Realty Biz News. Got a real estate related news article you wish to share, contact Mike at [email protected].
Households including at least one person with a high school diploma or GED can afford the typical mortgage payment in most large metro areas across the U.S., according to a new analysis by Zillow.
But soaring home values that have outpaced incomes have made down payments a barrier for many, particularly first-time home buyers.
Mortgage rates have dipped to multi-year lows in recent months, meaning monthly payments are relatively affordable for buyers who can secure a down payment. However, down payments are a challenge to afford for many as prices have grown faster than incomes over the past several years. An earlier Zillow study found that buyers need 1.5 years longer to save for a 20% down payment on the typical home than 30 years prior, and the difference is much more extreme in the most expensive metros – 13.3 years longer in San Jose, for example.
This effect is especially pronounced for first-time buyers who do not have the equity of an existing home to put towards a down payment on a new one. Zillow data shows that 46% of a typical down payment comes from savings for first-time buyers, compared with 35% for repeat buyersii.
“The influx of highly educated workers into already-expensive metros with stagnant or slow-growing inventory has made it difficult for those with less education and earning potential to enter those markets,” said Skylar Olsen, director of economic research at Zillow. “There can also be considerable variation within metros. While a bachelor’s degree may be enough to afford a mortgage on the typical home in the San Diego metro at large, it’s likely to be insufficient in pricey areas like La Jolla. And that’s only after scraping together a sizable down payment, which is a huge hurdle for most buyers.”
For households that secure a down payment, the median mortgage payments are affordable for those with a high school education in 36 of the 50 largest U.S. metros. The remaining 14 metros require earnings associated with at least a two-year associate’s degree.
The median income of a university degree holder is necessary to afford the median mortgage payment in the five most expensive West Coast metros. A bachelor’s degree is typically needed in San Diego and Seattle, while the typical income of someone with an advanced degree is required in San Jose, San Francisco and Los Angeles. The typical mortgage payment is affordable for those with associate’s degrees in Boston, New York, Sacramento, Washington, D.C., Denver, Portland, Riverside, Salt Lake City and Miami.
In only one metro, Oklahoma City, can those with less than a high school degree usually afford the typical mortgage payment. Households in Oklahoma City benefit from a combination of low housing costs – only three of the 50 largest metros have a lower median mortgage payment – and relatively high median incomes for households in which nobody has a high school diploma.
Median rent was 27.8% of the typical U.S. household income in Q1 2019. This is up slightly from the previous quarter and just below levels from a year earlier. Rent was most affordable for those in Pittsburgh, where the median rent is 21.4% of the typical household income. Los Angeles is the least affordable large metro for renters – 46.1% of the typical income is required to pay the median rent there.
Mike Wheatley is the senior editor at Realty Biz News. Got a real estate related news article you wish to share, contact Mike at [email protected]
New research from Zillow shows that recessions typically don’t have a negative impact on home values, contrary to what many experts have always said.
Other than the housing-led Great Recession of the late 2000s, Zillow’s analysis shows that home values have typically continued to grow through national and statewide recessions over the past quarter-century.
The U.S. reached its longest-ever economic expansion this summer, though growth is slowing. A recent survey sponsored by Zillow and conducted by Pulsenomics found that a panel of housing experts and economists expect a new recession to begin in Q3 2020. Demand for homes is expected to cool during the next recession, but few believe a housing slowdown will be a significant factor in causing it.
As some market observers predict a recession on the horizon, an analysis of recessions from the recent past shows that they often have a limited effect on the housing market. In the past 23 years, there have been two national recessions – the dot-com crash from March to November 2001 and the Great Recession from December 2007 to June 2009 – and several statewide or regional recessions. Home values broadly fell across the country during the Great Recession, but in most other cases annual home value growth remained positive.
Excluding the Great Recession, there have been 1,039 instances since 1997 of states being in a recession during a given month. Annual home value appreciation was positive 81% of the time in these months – an identical rate to months in which states were in economic expansion. Appreciation averaged 4.6% during economic growth and 4% during recessions. This indicates that while recessions do have an impact on the housing market, the widespread collapse of home values during the Great Recession is an outlier.
“The housing crash during the Great Recession left a lasting impression on our collective memory,” said Zillow Economist Jeff Tucker. “But as we look ahead to the next recession, it’s important to recognize how unusual the conditions were that caused the last one, and what’s different about the housing market today. Rather than abundant homes, we have a shortage of new home supply. Rather than risky borrowers taking on adjustable-rate mortgages, we have buyers with sterling credit scores taking out predictable 30-year fixed-rate mortgages. The housing market is simply much less risky than it was 15 years ago, and our experience in recent localized recessions shows how home prices can weather normal economic headwinds.”
As an example, several states with large energy sectors – Alaska, Louisiana, North Dakota, Oklahoma and Wyoming – experienced local recessions starting in 2015 when oil prices fell dramatically. Home value growth was positive year-over-year across all five states and only Alaska turned negative month-over-month during this time period – the largest monthly loss in value for the median home in Alaska was $700. Nationwide, annual home value growth averaged 4.3% during these recession months compared to 5.2% average growth during months of economic expansion in 2015 and 2016.
Mike Wheatley is the senior editor at Realty Biz News. Got a real estate related news article you wish to share, contact Mike at [email protected]
Finishing school, joining the workforce and moving out on your own is a rite of passage for many young people. Today’s young adults are taking longer to make this transition, and doing it less often overall than previous generations, according to a new Zillow analysis.
In 1980, 1990 and 2000, the tipping point age at which more people lived independently than not remained steady at 23. But by 2007, it had risen to 25, and then to 26 in 2017. And not only does it take longer for young adults to begin living independently, but fewer people ever do. A smaller share of adults of every age lived independently in 2017 than 1980, including a 10-percentage-point gap for 40-year-olds.
Typically, adults begin living independently later in more expensive
metros, and the gap has widened over the past four decades. Since 1980,
the tipping point age has increased by an average of about four years in
metros in the top quarter of most expensive home values, compared to
about two years for metros in the bottom three quarters. In 2017, the
tipping point age was highest in Riverside, Los Angeles, New York and Miami
at 29. Each of these metros have seen their tipping point ages increase
by at least five years since 1980, while it has only increased one year
in less-expensive Oklahoma City, for example – from 21 to 22.
Young people today more often pursue higher education, which typically delays when they begin working full-time. In previous decades, people with a high school education lived independently at similar rates to those with a college education, likely due to the additional years of earnings they can accrue in their early 20s while their college counterparts are in school. Now, there is a significant gap. Those with a college degree are more likely to live independently than those with a high school education by age 26, and at age 30 the gap widens to 12 percentage points.
Changes in social and cultural norms, as well as affordability challenges, likely explain some of the shift. Young people today are more likely than their predecessors to live in urban cores, where housing is more expensive and rent price growth has hindered the ability of renters to afford a home without roommates or save enough of their salaries each month for a down payment. Increased demand for starter homes as the large Millennial generation reaches typical home-buying age, along with persistently low inventory, has contributed to robust home value appreciation in many large metro areas, making it more difficult for first-time buyers to get into a home.
“It’s true that people are becoming homeowners later and later in life, but even before that today’s adults are taking significantly longer to simply live on their own,” said Skylar Olsen, director of economic research at Zillow. “While some may consider the impact of evolving tastes and cultural norms, as economists we can point to very real changes in household budgets that make the classic tactics of sticking with mom and dad or extending those college roommate years past graduation more appealing. As the costs of life’s basics outpace incomes, parents that offer housing after their children’s schooling has ended can provide breathing space, allowing the next generation to begin paying off substantial college debt. Smaller, more accessible housing markets often tout not just the possibility of homeownership for today’s adults, but simply the opportunity for independence and privacy – features of life that major job markets struggle to offer more and more.”
Mike Wheatley is the senior editor at Realty Biz News. Got a real estate related news article you wish to share, contact Mike at [email protected]
Zillow has some rather disturbing news for budding academics that could well persuade them to forge an entirely different career path. It says that “entry-level” teachers will need to spend more than half of their salaries on the typical rent in 19 of the 50 largest U.S. metro areas this school year, according to its latest research.
Nationally, it would take 46.8% of a typical starting teacher’s salary to pay the median rent. This improves to 35.6% for a mid-career teacher – still above the generally accepted 30% threshold for housing costs to be considered affordable – and 26.6% for the highest-paid teachers.
Starting teachers literally cannot afford the typical home or rental in San Francisco or San Jose – median payments are greater than 100% of a starting teacher’s salary in both metros. Finding a roommate or moving back in with parents may be the only option for these teachers. Indeed, a previous analysis from HotPads, a Zillow Group-owned apartment search platform, found that San Francisco renters can save more than $1,000 a month by living with roommates.
But it is not only the most expensive markets where teachers are cost burdened. New teachers spend greater than half of their income on market rate rent in some broadly affordable metros like Salt Lake City, Minneapolis and Raleigh.
Of the 50 largest metro areas, only Pittsburgh offers affordable rent for starting teachers. And even the highest-paid teachers would find the typical rental affordable in just over half of large metros.
“Most acknowledge that building more homes is required to address the root cause of eroding housing affordability. Without that new influx to take the pressure off rent and aggressive home value growth, it’s the public servants, like teachers, fire fighters, and nurses – the professions that keep us safe, our kids smart, and our families healthy – that often feel the pinch most,” said Skylar Olsen, Zillow’s director of economic research. “So don’t think of housing affordability policies as a choice between change and the status quo. Crowded, job-rich communities will change — and it will be either the buildings that change or the mix of people who can afford to live in them.”
Teachers who own a home are in a better position, due in part to the benefit of low mortgage interest rates and decades-long terms that lock in payments even as home prices rise.
Starting-level teachers pay 26.6% of their income for the typical mortgage payment nationally and spend less than 30% of their income in 31 of the 50 largest metros. The highest-paid teachers can afford mortgages in all but the four most-expensive metros in California. An additional chunk will come out of households’ income for property taxes, homeowner’s insurance, and common homeowner maintenance, but even after those expenses, ownership is still more affordable in many markets. All of this presumes, though, that they have managed to put 20% down.
Mike Wheatley is the senior editor at Realty Biz News. Got a real estate related news article you wish to share, contact Mike at [email protected]