This past week we were treated to slowing existing home sales with the reason being "Closings were down in most of the country last month because interested buyers are being tripped up by supply that remains stuck at a meager level and price growth that's straining their budget". Yes, homes for sale inventories are historically low, but the real issue is that home price growth and property taxes (based on your purchase price) makes buying a home unaffordable.
Even with historically low mortgage rates, the mortgage is only one component of home buying. Owners must:
- pay closing costs
- buy insurance
- pay property taxes
- maintain property (usually owners also modify home to meet their desires - renters do not)
Property taxes are a big deal. In most parts of the country, the longer you stay in your home - the property taxes remain moderate. But go out and buy a new home, and you will get a surprise with the increase in property taxes (even if you buy your new home for the same price you sold your previous one).
For first time buyers, not only are they surprised with the insurance and property taxes cost - but now they are faced with the time and expense of maintaining the property.
In 1972 Although interest rates were high, the home prices were about 2 times gross income. Closing costs were around $99. The median family today has income around $50,000 which would put the purchase price a little over $100,000 if the 1972 conditions could be teleported to 2017. Do yah think the home ownership rate would skyrocket if $100,000 homes were available in 2017?
The home price / income ratio constrains more than half of the population from home ownership. The Federal Reserve’s Board of Governors recently released a report showing that, if confronted with an unanticipated $400 expense, nearly half (44 percent) of Americans would have to sell something, borrow or simply not pay at all. There goes the possibility of down payment and closing costs to buy a home.
What happened since 1972? The cost of a home has gone up 10 times. Construction material costs have gone up 5 times - but so has family income gone up 5 times. Construction labor has gone up 5 times. Property taxes have gone up 5 times. That leaves the cost of land and development as the bogeyman.
Home ownership is likely now out of reach for over half the population. And many who could afford housing do not want the headaches or the expense.