Get an Update on Affordability, Home Equity Gains, and Tough Times for First-Time Homebuyers
There's a lot more to talk about in the world of personal finance and the five subjects that matter most than merely what the markets did this week. 65% of all the people in the United States are in families that own a home. Home prices are now at an all-time high, up 15% from last year. The median home price is now $375,000, meaning half of all the houses cost more. Half of them cost less. Homeowners in the last two years have gained $6 trillion in new wealth because of the increased equity in your house. The average homeowner over the past two years now has an extra $67,000 in new home equity that's available to you. You get a home equity loan or a home equity line of credit. You've got $67,000 at your fingertips that you can use for whatever you want to use it for. But at the same time, mortgage rates are now at 5% and rising. They're rising, in fact, at the fastest pace in 35 years. Mortgage rates a year ago were 3%. And as a result of all this, a quarter of homebuyers today are now paying cash. That's the highest percentage of homebuyers ever.
Who Can Pay Cash for That New House?
Well, who can afford to do that? If the average price is almost $400,000, who's got the $400,000 in cash to pay cash for the house? You know who has that money? Investors. Investors bought almost 20% of the homes that were sold last year in Atlanta, Jacksonville, Las Vegas and Phoenix. Investors bought 30% of all the homes that were sold in America. Well, this is a problem for first time homebuyers. There's two and a half million of them who were shut out of the market because there were no homes for them to buy because investors were scarfing them up. And because investors have so much money, builders are buying really expensive houses.
The Mounting Challenges for First-Time Homebuyers
First time homebuyers are 15% of the market, but either they can't afford the houses that are for sale or there's nothing available for them to buy. In fact, this is a long-term crisis, if you think about it, because homeownership is the most fundamental way that wealth gets created in America. And if we're denying the opportunity for homeownership to first-time homebuyers, meaning younger families, then we're denying them a key opportunity to create wealth over the course of their lifetimes. And on the other hand, you have to ask the question, is now even the right time to be buying a house, given prices today, given where interest rates are today? Less than 25% of those surveyed say that now is a good time to buy a home. A year ago, more than half said it was.
Look how incredible the sentiment has shifted in just one year. The current sentiment where less than 25% say that now's a good time to buy. This is the lowest sentiment since 2010, and we know where we were in our economy at that point. Think about this. Let's say you make a down payment of 10%. Well, we know what our interest rates are. There are 5% right now. We know where the average house is, $375,000. A 10% down payment at today's mortgage rates is going to give you a monthly payment of about $8,500. That's 50% more than a year ago because of the increase in the price of the house and the increase in the interest rate on the loan.
You tell me how many people are able to pay on a monthly basis 50% more than they were paying if they had bought a year ago? This is why I'm very concerned that home prices have to come down and they may very well come down dramatically in order to make them affordable to the people who are willing to buy. And that doesn't even include higher property taxes, homeowner's insurance and mortgage insurance. All of these are higher today than they were a year ago. And this is why it's no surprise first time homebuyers are at historically low levels.
So what if you are one of those first time homebuyers or want to be? Should you be buying a house right now? Well, let me put it into context for you.
First, make sure you're saving 15% of your pay for retirement. Retirement comes first. Before you buy a car, before you buy a house, before you buy a college degree, you've got to save for retirement. That's a must. Through your retirement plan at work is the ideal way to do it, especially with an employer match. If you're not saving 15% of your pay for retirement because you can't afford to do so, it also means you can't afford to buy a house. End of story.
Number two. When you do go to buy that house, don't spend more than 28% of your gross income on housing expenses. And I mean all housing expenses, pity principal and interest on the loan. That's the pie and tie taxes and insurance. It's not just the mortgage payment that counts. You've got to take into consideration the taxes and the insurance. And by the way, maintenance and repairs should be factored into that as well. 28% of year gross income. Watch out if you're going to buy a fixer upper, because there are going to be a lot of expenses that you're not anticipating that might bust your budget. Always assume everything costs twice as much and takes twice as long to get accomplished.
Take a Pass on Adjustable Rate Mortgages and Paying Mortgage Points
And one really scary item that we're beginning to witness in the world of home buying these days. ARMs. No, no, no. Not your arms. Adjustable rate mortgages. A year ago, they were less than 2% of loans. People didn't figure they needed to bother with an adjustable mortgage when they could get a fixed rate mortgage at two or 3%.
But now, with interest rates up to 5%, we now see a surge in the number of people who are going for adjustable rate mortgages. They are now 9% of all mortgage applications. This is the highest level in three years. Why? Because people are saying I can't afford the fixed rate of 5%. If I go with an ARM, they give me a lower rate of rate of only four, maybe even less. The problem is that we are in a rising interest rate environment. You don't know what the interest rates are going to be in two years or five years or 10 years.
If you go with an adjustable rate mortgage because it's affordable today at today's low rate, that rate could rise. And if it does, it could price you on a monthly payment beyond your ability to pay. You end up losing your house, you know, to adjustable rate mortgages. It's real simple. If you can't afford the monthly payment at a fixed rate loan, you can't afford to buy the house. It doesn't mean, “Oh, I'll just go to the adjustable loan.” No, it means you go to no loan, no purchase, no home. Wait until you can afford it. A lot of people are also now paying points. 75% are doing this. They're paying points to lower the interest rate. If you pay $4,600, you cut your rate from 5% to three and a quarter. Yeah, but where are you going to get the $4,600? Paying points is not something that is necessarily really affordable for everybody to consider.
Oh, and one thing we really need to keep in mind and factor in. If we look at the entire 12 month calendar, 40% of home sales occur right now from March through June. 40% of the total home sales for the year. So you've got to ask, how are home sales going right now? Because if they aren't going well right now, they're only going to decline further as we go through the second half of this year.