Home ownership is at the lowest point since 1995.
Of course part of the reason is the economy is still not great. But home prices went down big-time after the real estate crisis, so you’d think that would have helped those first-timers and the lower income bracket. Plus interest rates are at some of the lowest levels in decades. So you think it would be a great time for new homeowners to get into the market.
But that’s not what is happening.
Of course, part of the reason is getting a loan is harder than ever. Lenders are being very stingy with money and a first-time buyer needs at least a 10% down payment and sometimes much more. Plus they need very good credit with a score over 750.
That leaves a lot of people out.
The fact is, depending on where you live, having a good job doesn’t mean you can afford a home. Prices are still very high in the major metro areas where many millennials want to live like New York, San Francisco, Boston, and Seattle.
Sure there are plenty of good-paying middle class jobs in those areas. But even if you make over $100K in those cities, it’s not enough to buy a decent family home. In fact, 40% of households in those cities make more than $100,000 per year, but the share of residents who own homes has been steadily declining. And that’s a big reason why that home ownership level of 64.4% is so low.
During the real estate boom years a few years ago, you could buy a home with little or no money down. At worst you had to come up with 5% down payment. Many times you didn’t need any money down.
But these days, after the real estate bust, lenders aren’t taking any chances. Of course, who can blame them. Many got burned. But some might say are taking things a little too safe.
Fannie Mae and Freddie Mac just came out with a policy that says you only need 3% down to get a Fannie or Freddie insured loan. But lenders like Bank of America say they will not be going along with that guideline. And some say that in the big and most popular areas, 3% is not enough to make much of a dent in those markets. For the typical home in those big cities, where average home prices are up around $800K, 3% is still $24,000 dollars. It’s not common for young millennials to have that kind of money sitting around. Even with help from family, there’s few young professionals that can come up with that. And some young families haven’t had time to build a good credit score.
The Tampa Area
And you’d think the Tampa Bay area would be a good place for millennials to look for a home. Median home prices around here are under $200K. But there are far fewer good-paying jobs and that keeps young professionals away. Often even the good paying jobs are well under $50K and a starting teacher in Florida barely makes over $40K. So in Tampa Bay, and Florida in general, homes are still difficult to afford for a young professional. That’s why those big paychecks in the big cities are so attractive.
Generally, a lender looks for incomes that are at least one-third of the home price, or homes selling for 3-times the annual income, or a 3 to 1 ratio. Yet in some big cities with high home prices, the ratio jumps to 5-to-1 or even 7-to-1 in San Francisco for example.
Trulia.com says that a $90K salary would be enough to buy only 28% of the homes in San Francisco. In New York it would only buy about 2% of available homes — a small studio without much room for a family. And that’s income is considered middle class by most standards.
So it’s not hard to see why the real estate market, particularly in some big cities, is very slow and just doesn’t make sense for the typical first time buyer.
Makes you wonder if it ever will again.