Home prices are up, mortgage rates are higher so how come we still have a buyers’ market?
At first it seems like a strange idea. A “buyers’ market” is usually a situation where purchasers have the upper hand, where they can get goods at discount or bargain for an assortment of seller concessions. In today’s real estate marketplace it seems hard to believe that buyers have any advantages, especially given consistently rising prices.
But – if you look at most local markets – purchasers should be giddy. They have access to homes at a discount. Huh?
When we look at home prices we see little but good news. In November the National Association of Realtors reported that the median existing-home price for all housing types was $234,900.
“November’s price increase,” said NAR, “marks the 57th consecutive month of year-over-year gains.”
No doubt, home prices have been rising at a very nice clip. The old pre-crisis high was $230,400 – a record set in July 2006. And no doubt as well, $234,900 is a number that surpasses the old record.
The catch is this: A 2006 dollar is very different than a 2016 dollar. Both are “dollars” but they are not the same. According to the Bureau of Labor Statistics, it now takes $119.72 to buy the same bundle of goods and services that $100 bought in 2006.
In other words the real measure of wealth is not how many units of cash you have but how much they can buy. You have to keep your eye on buying power because that’s the real measure of wealth. As an example, several years ago I had an exceptional dinner in Romania at a very nice Bucharest restaurant with an expansive menu and a live band. The cost for the evening was 500,000 old lei. And while 500,000 seems like a big number the reality is that with the exchange value for US dollars at the time, my dinner actually cost about $13.50.
Home Prices
Now we can see one reason why purchasers today enjoy a buyers’ market. A home that cost $230,400 in 2006 should cost $275,835 in today’s dollars if we correct for inflation. It doesn’t. It costs – on average – $234,900. That’s $40,935 less than the fully indexed price, a figure which means real estate is selling at bargain prices in most markets.
Interest Rates
But wait, as they say on late-night TV, there’s more. Back in 2006 the average mortgage rate was 6.41 percent. If you bought a property for $230,400 and put down 20 percent you would need a $184,320 mortgage. At 6.41 percent the monthly cost for principal and interest over 30 years would be $1,154.
Today you would pay $234,900 for the same house. With 20 percent down you would need a mortgage for $187,920. At 4.20 percent – the rate for prime financing during the first week of 2017 according to Freddie Mac – the monthly payment with fixed-rate financing over 30 years will be $919 for interest and principal.
That means if you buy today your monthly loan cost will be $235 a month less than a 2006 buyer. That’s a savings of $2,820 a year.
The bottom line: Corrected for inflation, homes today typically cost $40,935 less than should be expected. Not only that, but even with today’s inflated dollars you’ll pay $235 less per month for ownership.
Wages
While home prices and mortgage rates are important measures of affordability we cannot overlook another key factor: wages. We added 2.2 million jobs to the economy in 2016 but the definition of a “job” no longer means 40 hours of employment per week. Instead, the final jobs report for 2016 showed that the typical employee earned $26 per hour but only worked 34.3 hours per week.
“There is much that is attractive about today’s home prices and mortgage rates but wage growth has been largely missing in action throughout our recovery from the Great Recession,”,” said Rick Sharga, executive vice president at Ten-X.com, an online real estate marketplace. “The hope for 2017 is that we continue to see wages improve and more good-paying jobs created, paving the way for more home sales.”
Location
In terms of purchase prices and interest rates one can construct a very clear case for today’s buyers’ market but we should also consider location.
According to Mark Fleming, Chief Economist with First American Financial Corporation, “the traditional perspective on house prices is fixated on the actual prices and the changes in those prices, which overlooks what really matters to potential buyers — their purchasing power, or how much they can afford to buy.”
It takes a certain number of dollars to buy a home and for many people the relationship between income and home prices is simply better in some locations. A chart by Fleming shows that the most affordable markets relative to income are Charlotte, Jacksonville, and Tampa while the markets which are least affordable include San Francisco, Virginia Beach, and San Jose.
With a little strategic moving purchasers can maximize their financial advantage even further. Attom Data Solutions looked at home costs in 540 counties and found that monthly ownership expenses for a median-priced home — including the mortgage, property taxes and insurance – were cheaper than renting in 354 locations (66 percent), arguably the best evidence for a buyers’ market you can find.
About the Author:
Peter Miller is a contributing writer for Ten-X and Auction.com as well as a nationally syndicated newspaper columnist. He is the author of the 2016 edition of The Common-Sense Mortgage.
