Millions of Young People Shut Out of the Housing Market
Interesting article in the NY Times today about how a lack of young first time home buyers is affecting the market, either by them being shut out or just choosing not to buy homes.
Tight lending standards and shortages of affordable housing have reduced the pool of potential buyers particularly among young people. This means less demand for starter homes which prevents those homeowners from being able to "trade up". This causes stagnation in the market.
Just wondering if anyone has seen this to be true in their area and if you think this trend will continue. If so, how should that affect RE investment strategy?
In Pittsburgh homes are pretty affordable so I think that while some are tied down by student debt it is still possible to get into a house. That being said starter homes are still purchased here.
As an agent I've been hoping more people will house hack. I did that to get started and it was the best decision I made money wise.
@Andrew M. It points to the wrong issue that has the potential to create stagnation. The real challenge will be rising interest rates. And, also, the expectations that first/second time home buyers have about those rates. Try running the numbers (for the "upgrading" home buyer) on increasing mortgage principal by 20% and moving the interest rate from 3.5% to 5%. Plus, the people that are doing that probably haven't lived in that first home very long so they haven't had the chance to paydown a lot of principal. You could point to home appreciation but unless you're changing metro markets you can't buy/sell in the same area and capture that appreciation.
I'll avoid any commentary on the shortage of "affordable" housing. At the moment it doesn't seem like too many metro areas are flooded with vacancies so the homebuilders/developers seem to be mapping well to the desires of the market. You could have some real fun if you wanted to talk about the "cost to break ground" in California and the impact on the ability to create affordable housing.
The missed that it's also affecting seniors that are being forced to age in place because it's difficult to replace what they have for the price point and the basis. We heard this a few years ago from Leslie Appleton-Young, the Chief Economist of the California Association of Realtors. I wrote a blog post a little over a week ago talking about how this is all going to get real political. It already is here in California.
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Those are interesting takes on it. @Andrew Johnson You make some great points. People may think twice about putting their starter home up for sale when they find out the cost of financing has gone up significantly since signing the papers on their first mortgage.
I think if you want it to work and have a stable job with median pay for the area you can buy a home. Boston was mentioned as a "very healthy". I'm not sure what is meant by that... but its not a place for first time home buyers.
Condo's are going for 50K over asking and without contingencies. Thats not realistic for the first time home buyer (or for a lot of people!) On the flip side we also see multis in the area selling at 5-6 CAPs this means that if you have a mortgage on these properties at 75% LTV you're cash flowing negative. People are banking on appreciation once again in these markets. I think its a very dangerous road to go down.
However, for a market specifically like Boston where there are countless large companies and new jobs being created in the area it will keep the market stable (for purchase prices) and it will increase the rent price to where they need to be to support them). But at the end of the day 5-7 CAPs are not enough margin for the large majority of investors to tolerate and thats where more and more properties are falling.
Shut out? Sounds like a bunch of overly dramatic sour grapes to me. Young people have the opportunity to buy any property on the open market just as anybody else can ... they are not being shut out of anything. If they can't afford the property at market price, then that is too bad, they can choose to rent, or choose to move to a less expensive market, or choose a more modest starter home that needs work, or any number of other alternatives ... if nobody can afford the price, then the price goes down until you have a willing and able buyer and a willing and able seller that come to an agreement, or else there is not transaction. That is the way the free market works.
What else is supposed to happen? Should the seller lower the price below market just so young people or any other specific group should afford it? Should the government subsidize them so they can purchase a home that they can't afford? ... we already saw how well that works ...
What I've learned living in SoCal all my life is that there is an incredible amount of wealth in this world, and that wealth has a tendency to concentrate not only into the hands of a few, but also in geographic areas down to the neighborhood, so it is actually quite amazing how far the prices can go if there is a persistent confluence of these factors that attract wealth to come together. This is a valuable thing to understand.
I am an investor in Southern California. What I am seeing and reading is that it's the entry level homes that are flying off the shelves. Investors and first time buyers are having a hard time finding the right home. We have a shortage of homes, which can only mean one thing....higher prices.
I am one of these young first time home buyers. I haven't owned yet, but I have lived in the best of neighborhoods and the worst of the neighborhoods where one literally is concerned for their life. Working in downtown Boston, a person has a few choices and these are just the most common; commute a very long ways to live somewhere affordable sacrificing a lot of your life commuting, commute a short ways and live somewhere that is very expensive, commute a short ways and be in a not so great neighborhood, etc... Picture myself a few years ago, $65K in college debt, $10K in car debt, and now I have to go spend hundreds of thousands of dollars in MORE debt for 30 years while the PMI compounds on top of that with the regular interest AND I don't have a pension like the generation before me did?!?! Hell no, of course I am going to be turned off from buying a house, and that is not even including the cost of maintaining the houses from 1800s around Boston and the time it will take. Okay, so this is the dramatic side.
From someone whose paid his own bills and has been on his own since 18 years old, it's not exactly a piece of cake though it is very possible. It depends on what the persons mindset is, if they are prepared and will accept that fact they will pay a house loan for 30 years of course they will buy a house but there are many in my generation of millennials that will buy and rent. I believe RE investment is absolutely the way to go if the numbers work out and you are ready to take a risk just like with any investment. Also note there are a lot of millennials who don't have a concept of balancing finances and will spend more money than they can afford.
The median income in this country is less than $60,000 a year. You can not afford an expensive house payment on that amount.
In expensive markets, I imagine it is hard to afford a starter home unless you go 1-2 hours away from the city center. Still, that housing is available.
You do also run into some interesting sociological trends. Overall, people are more mobile (especially early in their career), are getting married later, have kids later, etc. So by the time they are looking for that "starter home" with a yard, in the suburbs, etc. so Little Jane can run around they inevitably have more money (or a higher relative income) than they did before. And if you want to be mobile and rotate from place to place you probably don't want to buy a home (on a personal level) unless it's part of a house-hacking strategy. The payback period just isn't there for selling costs, limited principal pay down, etc. I'm guessing there's a mix of voluntary "young people out of the housing market" along with some involuntary members of that group.
Another fun graph to look at is the average square footage of a home. It's been creeping up (across the country) for the past 15+ years. All of a sudden that 1200 sq ft "starter home" is 1500 sq ft. You can't keep prices the same when you're adding another 25% in terms of square footage. Personally, I'll pretend I'm 80 years old and blame computers. Everyone now "has to have" an office for their computer and a good portion of the time it comes in the form of (another) spare bedroom.
Orange County Ca
We own a few properties in OC. Right now in two of the three cities we own property in the population in those cities ranges from 50-90,000 people. There are less than 100 total properties for sale in those cities. One city has less than 500 but that city is affluent and the average house start well over a million and go to 15 and up. Currently I get approximately 3-4 offers in the mail to purchase our properties. Anywhere from realtors looking for their clients, to investors looking to jump in
I hear this subject being brought up a lot. Why can't "they" build affordable housing. Let he rephrase that. Why can't they build affordable housing in a specific area. (The specific area being a high demand area) The reason "they" can't build affordable housing is because the start up costs of building a house is a average of 100,000 dollars. Add in all the permits, bring in utilities, street, etc you're starting 100k in the hole. I have a buddy building a small tract in Fontana Ca. And that's his cost.
Remodels run cheaper because they are remodels.
Younger people can buy. They just need the income. Like anybody else who wants a loan. Does it require sacrifice? Sure.
But don't despair. I hear the government is looking to gut (if they haven't done it) Dodd Frank by passing the CHOICE Act so we can go back to funny loans any day now.
