“FOMO,” short for Fear of Missing Out is an anxiety that we feel when we have the perception that there is something better out there than what we’re doing now. It is created by a concern that we may be excluded from a favorable group, activity, or opportunity. Now, what does that really mean? In the time that we’re living in, we look at our phones, we go online to social media we see what other people are doing and saying and we think to ourselves, “What am I doing with my life? All these other people are doing things that are more interesting than me and I’m going to fall behind.” FOMO has been part of the human experience for a long time in one form or another.
Despite rising home prices, low supply, and near-constant bidding wars, Americans are buying homes in record numbers. According to CNBC and the National Association of Realtors, more homes were bought in 2020 than any year since 2006. At the same time, according to a new report from ATTOM Data Solutions, today’s homes are less affordable than historical averages in 61% of U.S. counties. At the most basic level, what makes a home affordable comes down to simple math. Subtract your monthly rent or mortgage from your take-home pay, and you should have enough money left over for life’s necessities. This doesn’t necessarily mean you should give up on your home buying dreams. It just means you need to get creative.
Too many people are having to make tough choices, the result of two major trends —lagging incomes for low- and moderate-income families, and the soaring cost of housing, says Chris Herbert, managing director of Harvard University’s Joint Center for Housing Studies. “You look at this and say, ‘Is it a housing problem, or is it an income problem?’ I would say it is both.”
Today’s real average wage after accounting for inflation has about the same purchasing power it did 40 years ago, according to Pew Research Center. Meanwhile, the Joint Center for Housing Studies notes that both the median home price and median rent has risen faster than overall inflation over the past 25 years — 41 percent and 20 percent respectively.
Growth rates in home prices and rent vs. household income in the U.S. since 1960
Source: 1960-2000 Decennial Censuses and 2008, 2010 and 2017 American Community Surveys
Experts generally say that the maximum a family should pay for housing is 30% of their income. Any more than 30%, and a family is considered cost-burdened, which means they often find themselves making tough choices when it comes to other needs.
Affordability from a home price/down payment perspective is the worst it's ever been, meaning extreme barriers to entry," according to a BofA Global Research note by BofA Securities U.S. Economist Alexander Lin and BofA Securities U.S. and Global Economist Jeseo Park.
Still, “consumers remain steadfast in their interest to buy, but are uncertain," the analysts wrote.
Three big themes emerged in the report:
Higher mortgage rates are here to stay.
It’s still better to own than rent if you can afford the down payment.
Supply chain problems continue to fuel constraints on inventory.
Since 2020, the Federal Reserve has created an artificially low interest rate environment to weather the pandemic and reintroduced Quantitative Easing (seen only during the last great recession). People saw the opportunity and demand went off the charts while in a very limited inventory environment. Accordingly, prices went up. Now the Fed and Bond Markets are seeing too much inflation and the mortgage bond markets have pushed rates higher than they have been in the last 5 years. The Fed is now pushing Fed Funds rate up to slow economic activity (they do not control mortgage rates directly, the bond markets do) to try and tamp out the inflation, but many feel they were late and now they need to be more aggressive. There are still a lot of buyers but the 20-60 offers per home are most certainly in the rear window and we hopefully will go back to a more normal market where properties don't sell in a day or two with $50-100k over ask price. That said there are more buyers for homes than homes for sale. The inventory of homes for sale is low by about 4,000 homes in order to achieve a normal market in Utah. A normal market would be a home selling within 6 months of hitting the market – not hours after hitting the market. This still leans to the side that Utah will likely still see appreciation but not the 20% plus that we have experienced over the past 2 years.
When considering housing affordability, you must also consider and compare the affordability of owning a home vs. renting. In a paper published by the Urban Institute, Homeownership Is Affordable Housing, Mike Loftin examines whether it’s more affordable to buy or rent.
1. Renters pay a higher percentage of their income toward their rental payment than homeowners pay toward their mortgage.
“When we look at the median housing expense ratio of all households, the typical homeowner household spends 16 percent of its income on housing while the typical renter household spends 26 percent. This is true, you might say, because people who own their own home must make more money than people who rent. But if we control for income, it is still more affordable to own a home than to rent housing, on average.”
Here’s the data from the report shown in a graph:
2. Renters don’t have extra money to invest in other assets.
“Buying a home is not a decision between investing in real estate versus investing in stocks, as financial advisers often claim. Instead, the home buying investment simply converts some portion of an existing expense (renting) into an investment in real estate.”
Remember, you still have a housing expense (rent payments) even if you don’t buy a home. You can’t live in your 401K, but you can transfer housing expenses to your real estate investment. A mortgage payment is forced savings; it goes toward building equity you will likely get back when you sell your home. There’s no return on your rent payments.
3. Your mortgage payment remains relatively the same over time. Your rent keeps going up.
“Whereas renters are continuously vulnerable to cost increases, rising home prices do not affect homeowners. Nobody rebuys the same home every year. For the homeowner with a fixed-rate mortgage, monthly payments increase only if property taxes and property insurance costs increase. The principal and interest portion of the payment, the largest portion, is fixed. Meanwhile, the renter’s entire payment is subject to inflation.
Consequently, over time, the homeowner’s and renter’s differing trajectories produce starkly different economic outcomes. Homeownership’s major affordability benefit is that it stabilizes what is likely the homeowner’s biggest monthly expense, assuming a buyer has a fixed-rate mortgage, which most American homeowners do. The only portion of the homeowner’s housing expenses that can increase is taxes and insurance. The principal and interest portion stays the same for 30 years.”
A mortgage payment remains about the same over the 30 years of the mortgage. Here’s what rents have done over the last 30 years:
4. If you want to own a home and can afford it, waiting could cost you.
“We need to stop seeing housing as a reward for financial success and instead see it as a critical tool that can facilitate financial success. Affordable homeownership is not the capstone of economic well-being; it is the cornerstone.”
Now, if you have been sufficiently scared and if current headlines are making you nervous, call me and let’s create a plan – the only way to combat FOMO is with truth and facts so that you can make an informed decision that is not based on emotion. If you have any real estate questions or are looking to buy or sell your home in Heber City, Midway, Utah or Salt Lake Counties, please reach out to me with any questions. Please reach out to me at (801) 885-2558 or by email at brandonrwood19@gmail.com.