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.
