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Scary And Outrageous: Housing Has Never Been More Unaffordable
Let’s just get our editorial comment out of the way up front:
We explain why towards the end of today’s newsletter, but first…
Sometimes we hate to be right. Or, at least, correct on the theme and a bit off on the details driving that theme.
Not once, but twice in January, The Juice predicted that 2023’s biggest story would be a massive rebound in housing prices. We argued that any cooldown we saw would (a) not translate to meaningful affordability and (b) would be short lived.
We thought a decrease in mortgage interest rates would play a role in housing prices roaring back. Admittedly, we got this part of the story wrong. The 30-year rate still persistently hovers around 7%.
However, as we looked at homebuilder stocks back in January, we said this:
Homebuilder stocks have crushed it over the last six months.
We think it’s a textbook example of the forward-looking stock market. The idea that investors often value companies based on what we anticipate will happen. That means future bad news is often already priced into stocks.
This speaks to the stock market as forward-looking. Something we wrote about this Monday in relation to AI and tech. But it doesn’t only apply to tech. Clearly, it also applies to homebuilders.
We wrote the above roughly seven months ago as homebuilder stocks railed. YTD, the big players continue to crush it. For example, PulteGroup (PHM) is up about 69%, Toll Brothers (TOL) and KB Home (KBH) approximately 58% and Lennar (LEN) around 36%.
Here’s hoping you took our look at homebuilders and ran with it. If not, no worries. Our noise remains close to the ground in search of investment opportunities.
That said, just the other day we saw a headline from one of our financial media partners, Bill McBride’s excellent CalculatedRisk newsletter on housing (we strongly recommend reading Bill’s stuff). The headline read:
Black Knight Mortgage Monitor: Home Prices Increased Month-to-month to New Record High in May
We regularly digest – and love – Black Night data so we took a closer look at the firm’s report.
Here are a few nuggets directly from Black Night:
So there’s the short-lived housing price cooldown we predicted.
In terms of affordability, Black Night says “it now takes 34.2% of the median household income to make principal and interest (P&I) payments on the median-priced home purchased with 20% down using a 30-year fixed-rate mortgage.”
So that’s precariously close to the standard of not paying more than 30% of your income for housing. And it doesn’t take into account taxes, insurance, maintenance and other costs associated with home ownership. Plus, it doesn’t account for inflation eating into people’s budgets on everything from transportation to the cost of food.
In a separate report, Point2Homes makes it clear – if you want to live in America’s biggest cities – or some of the smaller cities that surround these places – you’re screwed. Unless, of course, you’re loaded.
While the percentage of listings over a million bucks ranges between 58.6% (in San Diego) and 16.7% (in Chicago), there’s a similar story at play in the 27 other cities in the study.
But it’s not just a big city problem. It’s a major metropolitan area and, in some cases, mid- and small-size city problem.
Here’s a look at the percentage of listings over $1 million in a handful of less big-name places:
On the bright side, the median home price in Hialeah is a relatively low $455,000. It’s even lower in Baton Rouge, at $261,000.
Even at that lower $261,000 price point, after putting 20% down ($52,500) and securing a 7% interest rate on a 30-year mortgage, your monthly payment on the typical Baton Rouge home, including taxes and insurance, hits right around $1,737. This requires annual income of nearly $70,000 to be considered affordable, further stretching the definition of a presumably struggling middle class.
The Bottom Line: All of this sucks because…
The places where people making middle of the road money (say, under $100,000) can comfortably afford to buy a home continue to be fewer and farther in between. We stress comfortably because it’s not always ideal to come in right at or above that 30% threshold, particularly if you want to live for something else for your house and save for retirement simultaneously.
Then there’s the outrageous cost of housing in America’s big cities, which continue to make them playgrounds for the rich amid persistent issues with homelessness and other social ills. That’s scary.
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