Posted on Jan 2, 2021
It is January 2, 2021 and the previous year has surprised everyone. Analysts predicted home prices to fall due to the global Coronavirus pandemic but in the US, home prices surged despite millions of Americans losing their jobs.
The surge is likely due to
If we look at historical interest rates, we find that they are historically low.
At this time, the cost to rent an apartment in Hayward, California is
Now, let’s see how much it costs to buy a house with the following assumptions:
The top half of the table below shows 4 different loan scenarios.
At this time, Zillow indicates that one with a credit score between 680 and 699 can get a 30 fixed rate mortgage for 3%.
For a conventional loan of house costing $300K, if one has $60K for the 20% down payment, their monthly mortgage including principal, interest, taxes, and insurance (PITI) would be $1287. This is far below the the cost to rent a 1 bedroom apartment in Hayward, CA.
For the FHA loan, one would only need a 3.5% down payment but they’d have to pay mortgage insurance. The total monthly mortgage-related expenses (PITI) are
These costs are all lower or equal to the cost to rent in Hayward, CA. The problem, however, is house prices in Hayward are very high. The closest large city with house prices between $200 and $300K is in Stockton, CA, e.g.
Now, just because the monthly mortgage expenses are lower than the cost to rent, that doesn’t mean one would qualify for a loan. Lenders require
The bottom half of the table below shows different income scenarios as follows:
In these scenarios, we find that:
If you have a gross annual income of $46K and
If you have a gross annual income of $60K and
If you have a gross annual income of $75K and
Assuming you currently live and work in or around Hayward, then it’s true that Stockton is a bit far. According to Google Maps, it’s about a 1 hour drive in no traffic between the two. However, according to this article, many people who work in the Bay Area can no longer afford local housing and have moved to Stockton and commute.
If you make $46K a year and rent an apartment for $1800 per month, you probably won’t have much left over to save. And, even if you could save $100 per month, house value appreciation could outpace your savings. When you buy a house, some of your monthly payments go towards paying down the principal on your home loan. That, in effect, is a form of savings (pink cells in table) but in the form of equity in the house rather than cash in the bank. After a few years, your wealth could grow in 2 ways:
You could then potentially sell the house and use the proceeds to put 20% down on another house thereby reducing your monthly mortgage payments even further.
According to this article, recessions typically occur around every 10 years but they don’t necessarily cause house prices to flatten or drop. Housing busts typically occur every 18 years. The last housing crisis was in 2008 so the next one may occur in 2026 (5 years from now).
Using data from Zillow Research Data, we can create a custom graph showing house value trends like the one below.
Similarly, we can chart the rent cost over time. Below is an example using US and Stockton, CA rents.