In case your pocket doesn’t feel fully picked by college costs, graduate school, wages that don't keep pace with inflation or that crappy service sector job, there is always the roof over your head to worry about. And when it comes to real estate, today’s young kossacks under 35 are swimming against the tide--of lemmings.
Young Kossacks are at a distinct disadvantage when it comes to real estate. We already start out with high levels of student debt and a decreasing return on those degrees facing jobs that, adjusted for inflation, mean "...a typical household's income is lower today than it was in 2000."
All in the face of escalating home prices that have increased 50% over the past five years nationally, and considerably more in many coastal markets.
Which leaves many of us renting, many of us trying to buy, and maybe even a few of us in a little over our heads, wondering how, exactly, are we suppossed to live?
Affordability used to mean keeping your housing expenses to 28% of your income—40% was considered the cut off by many. But even owning a mobile home these days can blow that statistic out of the water and there are a great number of families approaching the 50-60% mark. In many cities and especially coastal areas, housing that meets 40%--let alone 28%--is nonexistent.
Housing costs have so exceeded what people can actually afford that the traditional lending industry has given way to the subprime market, with 20% down payments gone the way of the dodo. What has enabled people to buy despite housing affordability hitting an all time low in 2005?
A bevy of toxic financing:
Any of these sound familiar?
No Money Down
Adjustable Rate Mortgage
No Doc Loan
These loan options were very popular because they helped people get into homes that they otherwise couldn't afford.
About 26 percent of mortgage loan originations by dollar volume in the first six months of 2006 were interest-only loans, according to the Mortgage Bankers Association, a trade group in the District. Such loans do not require borrowers to pay down the principal.
Another 13 percent were "option" adjustable-rate loans, which allow customers to pick their payment amount, including a low-cost choice that covers neither the full interest nor the principal.
In comparison, in the last six months of 2005, 25 percent of mortgages were interest-only and 8 percent were option products. Until 2000, less than 2 percent of consumers had interest-only or similar loans.
All of these were intended to address specific and rare instances and offer exceptions to the usual mortgage process for those who were self employed or in unusual circumstances. Instead, they have become the primary vehicles for addressing housing inaffordability. And they certainly were never intended to be rolled in together.
Now that housing price appreciation has stalled, the number of ARMs has fallen off and a number of subprime lenders are closing shop and going out of business.
High housing prices have led us to redefine affordability. Like the other big ramp up taking place in consumer debt, it is less about what you can afford than about what you want. It’s whatever you can squeeze into with a combination of no money down, interest only, no doc, adjustable rate you-name-it suicide loan.
But as everyone moved from the tech bust to the housing bubble, we were told to cobble them together or forever be priced out. Yet as the market is turning, with sales stalled, prices stagnating or dropping and sites like Ben Johnson’s The Housing Bubble Blog or the self-indulgent Iamfacingforeclosure.com usurping more of our time, some of the conventional wisdom is beginning to shift, too.
Which leads us to address the topic at hand: what can young Kossacks do?
Go Ahead, Throw Your Money Away on Rent!
Or is it throwing money away?...
With today’s high housing prices and record low levels of affordability, that ubiquitous maxim may no longer on its surface be true. Where I live in Los Angeles, a nice one bedroom apartment rents for $1200-$1400, a two bedroom for $1700-$2300. The cheapest condo in this area sells for $529,500, which with a $105,900 down payment would mean $2,564 a month. With a $52,000 downpayment, monthly mortgage costs would come to 2,890, plus Home Owner Association fees. Buying that condo with no money down is going to raise your payment to $3,205, though you will probably pay for that with a suicide loan.
Which means buying costs me 1 ½ time more a month than renting. Oh, and don’t forget to add:
a) 2 to 5 percent of the purchase price in closing costs
c) Property Taxes
d) other miscellaneous expenses
This has led a lot of young people to choose to sit out for the time being:
"For someone like me who makes decent money, I could afford a condo right now, but then I'd be house-poor," he said. "I plan on buying as soon as prices go down."
You may not be building equity, but in a period of stalling or declining prices, if you can keep your monthly rental expenses to a minimum, you can pocket the sizeable difference and be socking it away for that old vestige of real estate past: the down payment.
Of course, this means that rental vacancies are starting to drop as well. Los Angeles is currently at 1%, which means selection is low and prices are rising. Of course, a lot of those speculators are converting condos to apartments and offering their "investments" as rentals. But be careful if you rent a listed house--if they sell or foreclose, your lease is gone unless the building continues to function as an apartment complex.
Drive Until You Can Afford It
Oftentimes, you can try moving a short distance away to afford housing. The problem is that as more people are faced with this option, you have to move increasingly further off the beaten track-- and you will pay for it in time commuting, gas, and wear and tear on your vehicle.
In the Los Angeles area, you need to move about 45 minutes out to see any noticeable drop off in pricing. Realize that is an hour and a half per day that you are driving to work, or 7 hours per week. Now, I want you to do something painful. Take your weekly salary and divide by the number of hours you work. Is it 40? I hope so, but I doubt it; it's probably more than that. Now, add in the extra 7 hours a week you would be driving to and from work and do the same thing. Examine how much you reduce your hourly pay--because you are essentially working for less money.
You also need to be careful that where you buy is attractive enough that if prices decline people will still want to live there.
Still stuck between a rock and a hard place? Try moving in with more than just one roommate. Especially in city centers, prices go down as you rent a three-bedroom instead or a one- or two-bedroom. And with more roommates you will save money on utilities.
Buying with friends can be tricky--what if one of you wants to move or gets married? Splitting up a property can be tricky since real estate is not a liquid asset. But I know several people who have bought and brought friends in as roommates.
Do Whatever it takes! Damn the rent to own ratio!
Fine. But please, Only Buy if You are Going to Stay Put. Rates are at historic lows and if you can afford to get into something that you want to live in and make your home, buying now could work for you.
And for those of us who still rent? Well, my best advice is to keep saving (or paying down debt), pocket the difference and wait to see how the market will play out over the next two years.
If any under-35 Kossacks currently own a home or condo, please share your experiences and advice in the comments!
And best of luck to us all!