With Terry Story, 30-year veteran Real Estate Agent with Keller Williams in Boca Raton, FL
Home Affordability Drops To 10-Year Low
Steve kicks off Real Estate Round-Up with news that home affordability has dropped to its lowest levels in ten years.
According to Terry, homes are less affordable today because of higher prices and higher interest rates, relative to median incomes. To be affordable, a home should cost no more than 28 to 32 percent of your overall income.
If the home affordability index (HAI) is at 100, it means that the median family income is just sufficient to purchase a median-priced home. If the HAI falls below 100, homes are less affordable. If it rises above 100, homes are more affordable.
Right now, the HAI is at 92, the lowest it’s been over the past 10 years. Today, you need an annual salary of $100,000 to afford a median-priced home in the U.S. As a result, more than a third of all Americans can’t afford a median-priced home.
Home Prices Are Flattening
Over the past few years, Terry has been talking about the lack of housing inventory. That crisis kept seniors from selling and downsizing their homes and added to the home affordability problem.
Now, there are signs that the inventory crisis is starting to ease. The housing market is at an inflection point. Sellers are now looking at flattening home prices and are keen to sell before prices fall.
The rise in inventory is good news for the many buyers out there because mortgage rates are also reasonably low.
Steve notes that market tops are hard to call until they’re behind you. Instead of timing the market, it’s best to buy or sell when it’s right for you, adds Terry.
Rental Market Set To Boom
With the lack of home affordability putting homes out of reach for many low-to-mid-income Americans, people are staying in their rented properties. As a result, rental rates are beginning to rise after staying flat over the past few years.
Switching gears, Steve notes that the government is aware of all our financial transactions. Our bank accounts, brokerage amounts, and stock trades are all reported. Yet, people could anonymously buy and sell homes without the government’s knowledge. People who earned cash did not report their earnings and used that cash to buy condos and homes. This, in effect, was money laundering.
Now, that’s changing. New laws require that cash transactions, over a certain amount, be reported for home purchases and buyers’ names be disclosed. This has caused a sharp drop in cash sales in the luxury home market.
For example, in Miami, the corporate share of residential transactions has plummeted from 29% to 2%. This drop suggests that a lot of unsavory black money was involved in the Miami housing market, driving down home affordability for average Americans.
The situation has gotten so bad that developers in Miami are now offering enhanced commissions and bonuses. Realtors who bring in multiple buyers are being offered Teslas and Lamborghinis.
On a side note, should Terry somehow get a Tesla or Lamborghini, Steve reminds her that she’d still have to pay the tax on that fancy car parked in her driveway!
In closing, home affordability is at a 10-year low. Even so, if you’re still in the market for a new home, the slight increase in inventory, along with still low mortgage interest rates, make this a pretty good time to lock in your purchase.
Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital. Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.
Steve Pomeranz: It’s time for Real Estate Roundup. This is the time every single week we get together with noted real estate agent Terry Story. Terry is a 30-year veteran with Keller Williams located at Boca Raton, Florida. Welcome back to the show, Terry.
Terry Story: Thanks for having me, Steve
Steve Pomeranz: 30 years, Terry.
Terry Story: 30 years, that’s a long time.
Steve Pomeranz: [LAUGH] It’s time to stop.
Terry Story: No, I love it, I love it, I love it.
Steve Pomeranz: Good, all right, getting to the issues of the day. Home affordability is dropping to its lowest levels in ten years.
Terry Story: Yeah, that’s kind of sad.
Steve Pomeranz: Yeah.
Terry Story: You know it’s been a great ride. That’s, that’s what it is. It’s just expensive.
Steve Pomeranz: Okay, so, what [LAUGH] makes…thanks for that answer. What makes up home affordability? It’s prices of the home, of course.
Terry Story: Sure.
Steve Pomeranz: But it’s more.
Terry Story: It’s prices of the home. It’s the interest rate. You know, in every community and area’s different cost of living. So basically, what they do, Steve, is they come up with this formula, and they base it on a 100. Right now, it’s at…100 is, you know, affordable, right now we’re at 92.
Steve Pomeranz: Anything over 100 is more affordable. The higher the number over 100 the more affordable.
Terry Story: Correct.
Steve Pomeranz: The lower the number below 100 the less affordable.
Terry Story: Less affordable, exactly, so let me give you an example. Do you realize that one-third of our country can’t afford a median-priced home.
That’s a lot of people.
Steve Pomeranz: Yeah.
Terry Story: And do you know what kind of income you have to have to purchase a median-priced home in the United States today?
Steve Pomeranz: How much?
Terry Story: $100,000.
Steve Pomeranz: Wow. That’s the income you need.
Terry Story: That’s the income.
Steve Pomeranz: Most people on average, I think, they’re making around 60, 65 these days.
Terry Story: So.
Steve Pomeranz: I mean that’s an average.
Terry Story: Right, right. We’re talking average numbers here so. That’s just a-
Steve Pomeranz: So it comes as though it’s an algorithm over this formula as you mentioned. So, of course, it’s the price of the house. Of course, it’s the cost of the mortgage. But it’s also all of that relative to your income.
Terry Story: That’s right.
Steve Pomeranz: And they measure that and they say, you know, how affordable is it because your home should only have cost a certain percentage of your overall income.
Terry Story: That’s right between 28 and 32% of your income.
Steve Pomeranz: Yeah, yeah, okay, well, that’s bad news, I guess you could say. But I understand that the inventory crisis, this idea that we’ve talked about endlessly for the last couple of years. That nobody’s selling their homes and inventory is hard to come by, the inventory price is starting to ease.
Terry Story: That’s right, and I also think because of that it’s a tell-tale sign that things are starting to flatten out. And sellers are starting to say, jeez, maybe I should get out while we’re at a high number.
Steve Pomeranz: I’m at a pretty high number, maybe I’m not going to be at the highest, I could’ve sold three months ago or something.
But it’s always backward-looking, you never really know.
Terry Story: Absolutely, and it’s all really…you buy and sell when it’s right for you.
Steve Pomeranz: Yeah, that’s exactly right.
Terry Story: And the interest rate has to be factored in. We’re starting to see an uptick in inventory, which is great because we still have a tremendous amount of buyers out there that would love to pounce on something.
Steve Pomeranz: I think the way they put it is we’re at a turning point. In other words, the inventory is not declining or the rate of decline is much lower, so they think we’re at an inflection point where people are going to start to sell now.
Terry Story: Correct, and I agree. I can see it.
Steve Pomeranz: But you know you get back to this idea of affordability or unaffordability, and it points to the pricing of rentals.
Terry Story: Correct, yes.
Steve Pomeranz: Now the last couple of years we’ve been talking about the fact that rental prices, or the rental rate that you pay, has been flattening.
It hasn’t really been going up as much.
Terry Story: Right.
Steve Pomeranz: Why? Because there’s so many new units and buildings available around. But now that people are finding it difficult to buy homes, they’re staying with their rentals and that’s now starting to force rental rates to rise.
Terry Story: That’s correct.
Steve Pomeranz: Everything has a cause and an affect in the financial world.
Terry Story: That’s right.
Steve Pomeranz: Right, okay.
Terry Story: Yep.
Steve Pomeranz: Okay. So, let’s talk about a manifestation of real estate that has kind of passed, gotten out from under this idea that people have to report their purchase. I mean if you buy a mutual fund or a stock, you open up a brokerage account, you’re reporting all of this stuff and the government gets all this information.
But for so many years, and we were talking about in the 1980s, especially in Miami.
Terry Story: Miami.
Steve Pomeranz: People are able to buy a home or a condo or whatever, and be anonymous.
Terry Story: That’s right.
Steve Pomeranz: Yeah, and that’s changed.
Terry Story: That’s changing.
Steve Pomeranz: So tell us about that.
Terry Story: So basically, the way it goes is, cash buyers, it now has to be reported over a certain amount. Because of some laws that have been enacted, they’ve seen a plummet in the luxury home market because the fact that it has to be disclosed as to who is behind the corporate name.
Steve Pomeranz: They were wondering whether that was going to matter at all.
Terry Story: Correct.
Steve Pomeranz: But the statistic here is that.
Terry Story: Yes, it’s a diagram.
Steve Pomeranz: In Miami, where the corporate share of residential transactions has plummeted from 29% to 2%.
Terry Story: Yeah, that’s scary.
Steve Pomeranz: So, there was a lot of unsavory, perhaps, money.
Terry Story: Right.
Steve Pomeranz: In there somehow.
Terry Story: There’s foreign money.
Steve Pomeranz: People made cash and they never reported the cash, so what do they do with it? They stick it in a condo and…
Terry Story: Money laundering.
Steve Pomeranz: Okay.
Terry Story: [LAUGH].
Steve Pomeranz: But there’s one note here that really caught my attention.
And I feel a little bad for you.
Terry Story: I know.
Steve Pomeranz: It says here that developers in Miami are now offering enhanced commissions or bonuses, such as Teslas and Lamborghinis to realtors who can bring them buyers in bulk. What are you, chopped liver?
Terry Story: I don’t know, what do you think?
Would I look better in a Tesla or Lamborghini? What’s my style?
Steve Pomeranz: I think everybody looks better in a Lamborghini.
Terry Story: [LAUGH] Okay.
Steve Pomeranz: But I think Tesla’s a much better car, and it’s a lot more fun to drive.
Terry Story: And I need to find out what they define as bulk because I would love to go grab some foreigners and bring them over to these complexes and get myself a Lamborghini or a Tesla.
Steve Pomeranz: Yeah, that would seem pretty nice. Of course, you know that would be taxable.
Terry Story: Yeah, that’s true.
Steve Pomeranz: It’s a commission. But you don’t have the cash to pay the tax, but you’ll have the car in the driveway.
Terry Story: That’s true.
Steve Pomeranz: I don’t know, is that a good car, is a Lamborghini a good car to take clients around?
Terry Story: I think they’re hard to get in and out of.
Steve Pomeranz: They are, a Tesla is better for that anyway.
Terry Story: It would be difficult in a skirt.[LAUGH]
Steve Pomeranz: [LAUGH] Yeah, no, I would recommend against the Tesla. I’m not your financial advisor, but if I were, that’s what I would recommend.
Terry Story: [LAUGH]
Steve Pomeranz: Anyway, my guest, as always, is Terry Story, a 30-year veteran with Keller Williams located in Boca Raton and she can be found at terrystory.com.
Terry Story: Thanks for having me, Steve.