Friday, March 11, 2016

COULD YOU AFFORD THE HOME YOU ARE LIVING IN TODAY?

Lately, I’ve been posing this hypothetical question to more and more of my past buyer clients.  Simply put, if you had to purchase the home you are living in today at today’s prices, could you afford to do it?

For more and more of them, the answer is no.

With homes prices posting double-digit percentage growth gains for four consecutive years, many homes in the metro area (especially at the lower price points) have gone up 50% or more in value since the start of 2012. 

So the question becomes… if you paid $250,000 for your home in 2012 and it’s worth $375,000 today, could you afford to buy it? 

If the answer is no, it means you aren’t moving anytime soon. 

I’ve seen this dynamic in Southern California, where I grew up and spent my first 12 years as a real estate broker.  The home I grew up in cost $42,000 when my parents bought it in 1972.  Today, Zillow estimates the value of that home (which we sold more than 15 years ago) at $833,645. 

In that type of environment homes eventually became so expensive that no one could afford to move… which is a big reason subprime financing became so popular (and abused) in the early 2000s. 

People wanted to buy bigger and nicer homes… but under traditional qualifying guidelines, there was no way to do it.  So subprime financing essentially allowed people to make up their income, buy what they wanted to buy, and supplement their insufficient incomes over time by sucking home equity out of their appreciating properties to cover the difference.

Worked great, until the whole system crashed.

Today, there is no subprime financing… and so if you can’t qualify, you’re not going to be able to buy. 

Which means a whole lot of people are never going to move, either until they die, win the lottery or move out of the metro area. 

That means the available inventory of resale homes will remain artificially low, which means demand will continue to outstrip supply… and that will go on until prices get so high that businesses and those looking to relocate here from even higher cost states decide to go elsewhere.  Then prices level off and the cycle pauses.  

(Note that I said "pauses", and not "reverses".  As long as buyers are forced to have real jobs, real credit and real down payments in order to purchase a home, the market has legitimacy and foundation  When you don't have that, the market becomes a house of cards.)

There’s not really a clean solution to any of this. 

I believe inventory is going to be low for a long, long time.  And with tens of thousands of educated transplants living in apartments and holding good jobs, the demand for resale housing is going to remain very strong.

What that means, going forward, is that when it comes to housing, the same dollars are going to get you less and less as time goes by. 

Which means buying sooner rather than later is not only a good idea, it’s imperative.