With rising mortgage rates reaching highs near 7% not seen since the Great Financial Crisis and loan applications plummeting to a decade low, this is an advantageous time for cashed-up first-time homebuyers looking to scoop up a deal in this muted frenzied frothy market and to be able to finally lock in a deal before the madness picks up again in the foreseeable future.
Since the real estate market tends to lag and hence be easier to time as an asset class/sector itself, prices tend to reflect the market environment from a few months earlier, almost playing catch up. For example, today in October 2022, the cooling of the housing market is based on the late summer months’ rising inventory levels and higher mortgage rates that resulted from the Fed’s steep hike in Q2. Unlike equities where prices move in massive swings especially during times of heightened volatility, real estate is taken down a notch, only in terms of volatility though, not performance!
However, with less than 30% of Americans putting down all-cash bids on their future home purchases these days and instead taking on a 15/30 yr mortgage or renting altogether, it’s still hard to see any discount, deal, or reprieve in this cooling housing market for majority of potential buyers.
No matter how much you make since the more you make, the more you give to Uncle Sam anyways, my rule of thumb is to never spend more than 30% of your annual income on housing costs which include mortgage interest, property taxes, maintenance, construction, renovations, heating, utilities, etc. since it all adds up fast and there are numerous variables to take into consideration when deciding between renting vs buying, namely how long you plan on staying in the property to cross the breakeven point.
30% should be easy to remember since it also follows my investment recommendation of never putting all your eggs in one basket, in this case no more than 30% of your net worth into one investment class, let alone company.
According to RealtyHop’s housing affordability index, many cities in the U.S. are still difficult to afford. Out of the 100 cities in the index, the average American would have to dedicate at least 40% of their income to own a home in 42 of them.
The index takes into account median household income, median for-sale prices using RealtyHop listings, local property taxes using American Community Survey (ACS) Census data, and mortgage expenses.
Projected mortgage expenses assume a 30-year mortgage, 5.5% interest rate, and 20% down payment in this case.
Here is a list of the least affordable places in the U.S.
To no surprise, they’re still all on the coasts (west and east) where jobs are most plentiful and competition is fierce! Workaholism is real here. I guess the heartland and sunbelt are still winners in this case!
1. Miami
Median household income: $44,581
Median home price: $610,000
Share of income: 87.39%
2. Los Angeles
Median household income: $69,695
Median home price: $975,000
Share of income: 85.34%
3. New York
Median household income: $68,129
Median home price: $925,000
Share of income: 82.47%
4. Newark, New Jersey
Median household income: $38,854
Median home price: $385,000
Share of income: 77.52%
5. Hialeah, Florida
Median household income: $40,036
Median home price: $465,000
Share of income: 72.55%
6. Long Beach, California
Median household income: $70,677
Median home price: $799,000
Share of income: 69.77%
7. San Francisco
Median household income: $126,117
Median home price: $1,388,000
Share of income: 66.56%
8. San Diego
Median household income: $89,357
Median home price: $950,000
Share of income: 65.65%
9. Anaheim, California
Median household income: $80,486
Median home price: $834,250
Share of income: 63.98%
10. Santa Ana, California
Median household income: $74,185
Median home price: $750,000
Share of income: 62.14%
11. Oakland, California
Median household income: $82,649
Median home price: $798,000
Share of income: 60.85%
12. Boston
Median household income: $79,797
Median home price: $775,000
Share of income: 59.38%
As a lifelong New Yorker, although seeing rents skyrocket to over $5k per month is outrageous to most earners with an average annual income of ~$70k barely making ends meet, we cannot forget those earning above $250k who also report living pay-check-to-paycheck! An average income of ~$70k can barely cut it in the Big Apple which seems pretty low in general especially now as the city is coming back like never before and business is starting to pick up and prices too!
As a reference, I took the subway for the first time in ~2 years and it was jam-packed! Living frugally and below your means may be difficult yet to live here or in SF where the median home price is above $1m, it seems to be clearly worth it for the millions who’re continuing to flock here even when there seem to be no deals in sight!
In sum, there are tradeoffs to everything! Welcome to Econ 101.
For some perspective, an average family of 4 lets say living in Miami, Los Angeles, or New York would have to dedicate over 80% of their annual income to housing in these locations which is not soundproof nor realistic in the long run, especially if a few income sources dry out.
As mentioned above, following the ⅓ rule when buying property seems to be most prudent which means only ⅓ of your income after taxes should go toward your home. Less is fine but no more. As your income increases, please adjust accordingly to makes sure your quality of life also improves otherwise it’s not worth it to earn so much and not reap the gains! This is simply a benchmark to follow at first.
Affording homeownership when rates and costs across the board are rising may seem impossible nowadays however someone has to live somewhere! There’s always a deal out there, it’s just whether or not you have the patient and fortitude to search harder than most.
There’s this tendency to fall into the comparison trap in your twenties and thirties. As a 21-yr-old, I cannot help but look at what influencers online are doing but at the end of the day, we don’t really know their situation after all and must pay attention to what we can control and focus on instead.
With more millennials living at home than ever before, be proud you get to spend time with your family, a priceless investment in itself. Things always end up working out in the end.
Since a bear market lasts around a year and there are already signs that the Fed’s hawkish hikes are already cooling the job market, if you can wait out the storm and build up your reserves in the meantime, you’ll be better equipped and set to jump on opportunities when the price is right!