With Terry Story, 28-year veteran Real Estate Agent with Coldwell Banker in Boca Raton, FL
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Fannie Mae Ups Its Debt To Income Ceiling By 5%
This week’s Real Estate Round-Up starts with a discussion about Fannie Mae, the big, government-sponsored financing giant, raising its debt-to-income ceiling from 45% to 50% in July. The debt-to-income ceiling, explains Terry, is the ratio of your total debt (mortgage, auto loans, student loans, credit cards, etc.) divided by your gross income, expressed as a percentage. By raising this ceiling, Fannie Mae gives borrowers a bit more wiggle room on the amount of debt-related payments they can take on. So home buyers, for example, can now have up to 50% of their income tied to various loans, including housing. As a result, says Steve, they’ve got to pay taxes and manage their living expenses (grocery, gas, clothing, insurance, etc.) out of the remaining 50%, which doesn’t leave a whole lot of room for savings and investment.
Terry also says people should not be alarmed by this because, before raising the debt-to-income ceiling, Fannie Mae did some research and found that a significant number of these borrowers have good credit and were not prone to default. So they’re not reckless; they just have higher debt because incomes aren’t rising that fast while the cost of housing, in particular, is going up. So upping the ceiling gives more people access to home buying but, Steve cautions, borrowers must be careful to not overextend themselves and have no money left over for savings and the long-term.
Where Did All The Starter Homes Go?
Next, Steve turns his attention to starter homes and their lack thereof. While there are a lot of more expensive homes being built, there aren’t too many starter homes on the market for first-time home buyers. Terry says they’re simply not economically attractive to build. About 35% of the total cost to build a home goes toward expenses such as regulatory fees, zoning approval, meeting environmental and energy efficiency standards, water and sewer hookups, and the cost of delay as developers pay property taxes and interest on loans while their land sits empty waiting for approvals. Moreover, these administrative costs keep rising and are up from $65,000 in 2011 to $85,000 in 2016 for an average home. So if you’re buying a $200,000 home, $85,000 of that is just fees alone. Then you’ve got the cost of constructing a quality home with material that meets newer standards, and then the builder needs to make a profit. So builders are focusing on more expensive homes where their profit margins are higher.
Steve reminds viewers that though $85,000 in fees per home may seem excessive, there is an upside to having these zoning laws in place: they help the environment, manage population levels so streets don’t get too crowded, provide for water safety, community parks, etc.
Luxury Homes Are Still A Bargain In The U.S. Compared To The Rest Of The World
Seguing into expensive homes, Steve notes that luxury homes in the U.S. aren’t all that expensive compared to the rest of the world. Terry notes that the number of luxury homes (costing over $1 million) was up 36% in Guangzhou, China; up 22% in Beijing; and up 22% in Toronto, Canada—the top three for new luxury homes. America’s top cities for luxury homes are the usual suspects: Miami, Los Angeles, San Francisco, and New York.
Investors Focusing On Build-To-Rent Homes
Finally, Steve and Terry talk about the paucity of homes for sale, with buyers having difficulty finding property they can buy at reasonable prices. This has led to interest in build-to-rent homes where investors buy up homes only to rent them out, betting that a shortage of homes for sale will support the ongoing rental boom and deliver an average of five to eight percent more than buying an older home and renovating it.
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 Round-Up. This is the time every single week we get together with noted real estate agent Terry Story. Terry is a 28-year veteran with Coldwell Banker located in Boca Raton, Florida. Welcome to the show, Terry.
Terry Story: Thanks for having me, Steve.
Steve Pomeranz: So I saw a report I wanted to discuss with you that says that Fannie Mae, the big government-sponsored financing giant is raising its debt-to-income ceiling from 45% to 50% in July. What is the debt-to-income ceiling?
Terry Story: Basically what it is is you take your gross monthly income and then you compare it against your debt, which would include auto loans, credit cards, student loans, and they take a percentage of that and based on that, they determine what your payment’s going to be. So, by raising the debt-to-income ceiling, basically, it’s allowing you more wiggle room in the amount of payment you’re going to be able to pay. You’re going to be able to receive a higher payment. Now, keep in mind these are big numbers, so that means 50% of your income is going toward housing when you factor in debt.
Steve Pomeranz: Exactly, and you know the remaining 50% that you have to spend, we’re talking about taxes now as well have to be considered. It doesn’t leave a whole lot of room left for saving and for living.
Terry Story: Living. I mean, it doesn’t take into account food and tuitions and insurances and all the expenses that we all have. So you have to understand why they’re doing it. When we talk about this, you’re like, “Oh, no! They’re raising the debt ceiling! It sounds like we’re going back to 2006 before the crash!” It does, but they also did a study, and interestingly enough, Fannie Mae did some research and they found that a significant number of these borrowers have good credit and were not prone to default. So they’re not reckless, they’re just … They have higher debt. Let’s face it, things are expensive.
Steve Pomeranz: Yeah, well, incomes aren’t rising that fast and the cost of housing is going up. I mean, housing is becoming more expensive, so a lot of people are getting shut out of borrowing for mortgages and they can’t buy a house. So this gives more people access to home buying, but be careful out there, because you really want a lot of money left over for your life.
Terry Story: Right. Exactly.
Steve Pomeranz: Right, okay. Here’s another very interesting topic. Where did all the starter homes go?
Terry Story: I know.
Steve Pomeranz: Yeah, I mean, we’re seeing a lot of more expensive homes being built. What about the homes that aren’t so expensive, that starter home that people just getting into a home can afford only so much. Where are those homes?
Terry Story: You know, the builders aren’t building them. Interestingly enough, the builder incurs about a…35% of the total cost to build a home goes to expenses like regulatory fees, like applying for zoning approval, meeting the environmental and energy efficiency standards, water and sewer hookups, the cost to delay as developers pay property taxes and interests on the loans while their land just sits there empty. So, do you know, Steve, that these costs, to give you an idea on an average home, has gone from $65,000 in 2011 to $85,000 in 2016? So if you’re buying a $200,000 home, $85,000 of that is going to these fees. Then you’ve got the cost of, you know, constructing the home, and then, of course, the builder needs to make a profit. So if the builder doesn’t see that he’s able to make a profit, they’re going to change their marketing strategy and build more expensive homes where they can turn to making a little more money because of these high fees.
Steve Pomeranz: If $85,000 out of $200,000 is going just for paying, you know, for zoning and regulatory issues and all of this other stuff, you know, which does have benefits. Let’s not just look at the money only. I mean, zoning laws do help through the environment and there’s good reasons to keep a population at a certain level so streets don’t get too crowded, safety of water, of adding parks and things. Okay, so these are important, but what it does is every cause has an effect.
Terry Story: Right.
Steve Pomeranz: The effect here is that builders don’t see an economic benefit in building a 200 or $250,000 house. They’re going to try to build a $500,000 house so they can make a decent profit for all their efforts and risk.
Terry Story: Exactly.
Steve Pomeranz: Mm-hmm (affirmative).
Terry Story: So these are real, and that’s why we’re not seeing all these, you know, entry-level starter homes.
Steve Pomeranz: Well, talking about expensive homes. When we compare the cost of luxury homes in the United States and we compare them to the rest of the world, the United States isn’t that expensive. Tell us about that.
Terry Story: Yeah, we’re a bargain. The top three global cities to land on the list were Guangzhou, which is in China, that’s up 36%. These are luxury homes, now, luxury home being homes over a million. Beijing, they rose 22%. And then our neighbors in Toronto, up 22%.
Steve Pomeranz: Where do US cities come?
Terry Story: You know, the prime global cities were Miami, Las Angeles, San Francisco, and New York.
Steve Pomeranz: There’s no surprises there. But, what I think you’re saying is that the property in other countries outside the United States are generally more expensive.
Terry Story: Yep, exactly.
Steve Pomeranz: Mm-hmm (affirmative). That’s very interesting.
Terry Story: In the luxury market.
Steve Pomeranz: Yeah, in the luxury market, of course. Alright, so finally, one more topic here. This whole idea about, you know, there’s a need for homes. We’ve talked about this many, many times on the show, that sellers aren’t really selling, buyers are having difficulty finding property so, therefore, prices are rising, so a lot of investors are focusing on what they call build-to-rent homes. Tell us about that.
Terry Story: Yeah, they’re betting on the fact that the rental boom will continue, and that’s why they’re snatching up all these properties. Even as the foreclosures dry up, they’ve purchased in the past cheap foreclosures, but what they’re finding is if they can pick up a property and build a new construction rental complex, they can fetch an average of five to eight percent more than buying an older home and renovating it.
Steve Pomeranz: Interesting.
Terry Story: So, their projects are in favor that the rental market will continue to grow and they’re focusing on capturing that market.
Steve Pomeranz: Well, we’re seeing it in our own local market. I mean, there are so many communities that are being built here for rent.
Terry Story: Well, yeah, and the rent is not cheap either, by the way.
Steve Pomeranz: I know, I know it isn’t. Actually, I just did an analysis for a client who’s looking to buy in New Jersey and it was $1,000 a month cheaper for her to buy a home with cash than it was for her to rent currently.
Terry Story: Wow.
Steve Pomeranz: Yeah, amazing. My guest, as always, is Terry Story. Terry is a 28-year veteran with Coldwell Banker located in Boca Raton, Florida, and she can be found at TerryStory.com. Thanks a lot, Terry.
Terry Story: Thanks for having me, Steve.
