The hurdles to home ownership

By Zain Jaffer

With the continuous set of Fed rate hikes that haven’t really stopped, a forecasted recession that threatens job security, and threats to take home pay and discretionary spending, this really isn’t the time for homebuyers in terms of affordability and financing.

There are of course exceptions. Sometimes a home seller wants to just move out and is willing to accept a lower bid, and it turns out the home is perfect for the buyer. But those are serendipitous situations and don’t really happen most of the time. For now let’s discuss the situations and factors that most home buyers have to contend with these days.

Higher mortgage rates
Needless to say the Fed overnight lending rate hikes have forced banks and other financial institutions to hike their own loan rates, including mortgage rates, since their source of capital is now more expensive. Not only are the mortgage interest rates higher, on average from around 3% last year before the hikes these are now in the 7-8% range. Since the possibility of default increases with higher monthly amortization, especially with a tough economy, banks are more careful now to make loans only to people they feel can really fully pay the full mortgage.

Fewer homes available, higher home prices
Existing home owners who had plans of selling are hesitant to sell at a lower price because if they end up buying a new home, instead of paying the old mortgage rates they might still be paying, they will now be in the same predicament as new home buyers. Plus the pandemic caused a slowdown and in some cases stoppage of home construction that has left a shortage of homes across America, with some exceptions of course.

Again because existing home owners are now hesitant to sell, they are not inclined to give discounts to buyers, especially since there is a shortage of available houses anyway.

For buyers who are unable to save up equity and have to buy a home mostly on a loan, they will end up overpaying for the house they are trying to buy.

Take for example a $400,000 home. Assuming a buyer has saved $100,000 equity, the mortgage needs to be the balance of $300,000. If bought at a 3.5% annual interest mortgage for a thirty year mortgage, the monthly payments would be around $1,630, and the total after thirty years (360 payments) is $586,968. If with the interest rate hikes it moves up to 7.5%, the monthly payments go up to $2,380 and the total after thirty years (360 payments) would be $857,151 for a $400,000 house. These amounts do not factor in any insurance, fees, taxes, and other surcharges.

There’s also the Debt to Income (DTI) ratio to contend with. If you are paying roughly one third or more of your income for a home mortgage loan, and have other bills like electricity, water, school loan, food, clothing, and others, that doesn’t give you much for extras. Relationships can suffer, and arguments are common, over lack of money issues.

Cash buyers are out there
Probably one factor that home buyers need to contend with is that there are many wealthy individuals, individual or group investors, and companies ready with cash to snap up homes often in bulk then resell these individually to retail buyers. The $400,000 house in the example above would be bought for less, if it were part of a bulk deal unfortunately.

The Great American Dream
Owning a home is part of the great American dream. Unfortunately we are perhaps in a time where that dream is now harder to achieve, as compared to decades ago when most people could afford to buy a house they wanted. It appears that prospective home buyers will now have to rent longer, and be at the mercy of their landlord.

Home ownership is the most common way for people to build their wealth, since instead of a rent expenditure they are buying an asset that has traditionally sold for a higher price in many cases. Government and the private sector should work together hand in hand to stabilize this and prevent an entire generation from not being able to achieve this dream.