For the last couple columns I’ve been talking about whether we might be able to predict where housing prices are headed, based on the long term history of pricing here in Broward County. But something has come up in the news on a related issue, that I think merits a brief commercial message.
This past week there was an article in Barron’s financial weekly on a disturbing trend in real estate – namely, why is there an increasing tendency for people, especially at the higher ends of the income strata, to rent as opposed to own their home?
Five reasons were cited:
(a) Although mortgages are indeed available, lending standards are tighter than during the mid-oughts real estate boom.
(b) Inventory in many areas of the country – at certain price points and property types – is tight.
(c) Interest rates have bounced up from historic lows. The yield on the benchmark 10-year Treasury note has increased by 130 basis points from its low in July 2016. That makes a typical mortgage payment (as mortgage rates are very sensitive to the 10-year Treasury rate) about 15 percent higher.
(d) Desire for flexibility. There are responsibilities associated with home ownership. Increasingly, people just want to send a text or pick up the phone and tell somebody else to handle it – and not at their personal expense.
And finally (and perhaps most germane here in southeast Florida)
(e) Prices have gotten so far ahead of themselves that people just don’t think owning their personal residence is a good idea, let alone a sound investment.
Let’s bring it down to dollars and cents. After all, your mortgage lender is going to want that (even if they smile when asking), and their underwriters take no prisoners.
Consider the sale price of a single family home here, limited to Wilton Manors, Oakland Park and Fort Lauderdale, over the last 60 days that is smack at the 80th percentile (the start of the top 20 percent). A pretty nice home, but hardly grand-luxe. Well, according to MLS data, the sale price of that home was $783,000.
Let’s assume you put 10 percent down. If so, I would estimate the monthly payment on this home (including property taxes and insurance) is about $5,200 per month. (Caveat: this is a “horseshoes and hand grenades” estimate; every property would be different and only a mortgage broker could give you the exact number.)
Even so, to afford that sort of payment, a lender would be looking for your household to have an income (again, horseshoes and hand grenades) in the area of $200,000 per year (ideally higher). You can (should!) ask yourself, how good are the jobs in southeast Florida, and how many households actually have (and will continue to have) that kind of income?
Well, you might argue, a lot of these buyers are from the Northeast Corridor (Boston, NYC, DC) and are making much larger down payments, or paying cash. But a lot of these people are also very sophisticated and thus aware of the factors outlined above.
It then becomes something like the child’s game “musical chairs.” For a while, everybody thinks they will get a chair when the music stops. But not everyone will. And, eventually, people will start to realize that. It seems, per the Barron’s article, that some already do.by