As my son works his way through college, we’ve started having discussions about where he will live upon graduation. Until recently, that had never been a concern of mine, but the housing situation has changed rapidly on us from when he started college only a few years ago. Unfortunately, he’s not the only one that is walking into this situation. Many young people are trying to buy their first house or upgrade to a larger house, but they are being met with limited inventory, higher prices, and rising interest rates.
According to a recent CNBC article, home affordability is “nearly the worst on record”. Locally, we’ve all seen or heard stories of limited inventory and bidding wars taking place on almost any house that hits the market. Realtors have told me stories of offering $100,000 over asking price on homes and losing out on the deals. These higher prices have been blamed on many things like the Covid pandemic, limited supply due to worker & material shortages, high land costs, and new residents moving from higher cost areas willing to pay with cash. According to this CNBC article, the increased costs have caused consumers to stretch their payment-to-income ratio to a staggering 32.5%. According to Black Knight, a mortgage technology and data provider, if prices increase 5% more, home affordability will be the worst on record. At this rate, that increase seems very possible.
The impact can be seen in a couple of local examples. A colleague and I were discussing the purchase of a $350,000 house, and the monthly loan payment grew by over $500 due to the recent mortgage rate increase of 2%. Lenders are also aware of this issue as they have started reevaluating the pre-approvals provided to buyers. We’ve seen a local example of a buyer originally prequalified for $310,000, and the bank sending a letter informing them that now they only qualify for $255,000. All of this while houses are only getting more expensive; thus, significantly reducing their purchasing power.
Cottages at Cades Cover in Maryville, TN
Communities have started to adjust their housing options to fight this affordability issue. According to Bryan Daniels, President/CEO of the Blount Partnership, our community has started switching to building multi-family dwellings, such as Condos and apartments, to battle these higher housing costs. However, these options are also seeing increasing costs. The attached article tells the story about a Knoxville man whose rent was increasing approximately $300 a month, which was about 25% of this previous rental payment. Per the article, that is right in line with Knoxville’s rent increase as “rents in Knoxville are up by 36.3% since the start of the pandemic in March 2020.”
As these costs increase, consumers are going to have to make hard choices in their financial lives. I’ve always been an advocate for saving for a 20% down payment, but of course, I’m a CPA and conservative by nature. Dave Ramsey feels the same way and promotes 20% down on a 15-year mortgage, but this can limit the amount of house you can afford under his philosophy. If you’ve got the discipline to make this happen, you are setting yourself up to be successful financially and not overspend on the housing portion of your budget.
Whether planning for yourself or other important people in your life, the process can be long and filled with difficult decisions. These choices won’t be getting any easier, so it’s important to have a partner that knows you and acts in your best interest at all times. If we can be of assistance with your financial decisions, please check out our Purpose Built Planning process at lecontewealth.com.
