In this episode, Rob and Adrian take a deep dive into current market home affordability. If you like to geek out on data then this is your episode. They cover nationwide statistics based on the affordability index. Tune in and let us know what you think!

Links & Resources Mentioned:

https://roi-fa.com

https://roi-tax.com

https://delavan-realty.com

https://www.directorsmortgage.com/loan-officer/adrian-schermer

www.getrichslowpodcast.com

ROI Disclosures

Episode 6 Transcript

SUMMARY KEYWORDS

average, numbers, adrian, home, payment, affordability index, data, income, people, median, rate, market, october, doable, interest rate, house, peak, mortgage insurance, point, index

SPEAKERS

Intro, Adrian

Intro 

Welcome to the get rich, slow podcast. This is the stuff we and our expert guests Wish we knew a decade ago to get the most out of our financial life will provide you with insight into wealth building activities and practices that can expand your net worth exponentially. get insight from top professionals who will reveal how to build wealth the long way, work smarter, not harder and identify your financial blind spots. With over 25 plus years of experience as licensed real estate professionals and a long track record of winning for their clients. Robin Adrian will teach you what it takes to be an everyday real estate millionaire.

Adrian 

Hello and welcome again. Future millionaires. Adrian SHERMER here at the get rich slow podcast, I’m joined by my co host, Rob delevan. Rob, good morning. Good morning. How are we today? Oh, feeling pretty good. I’m in my new house. As you can maybe tell I don’t have blinds yet. But we’re gonna work on that here. I’ve made the step towards what we’re talking about, I believe, you know, you got to practice what you preach. And that’s what I’m in the middle of here. Yeah. And it’s, it’s been a lot of fun. I’m sure we could probably build out a future episode just on some of the things that we had fun with and your purchase, which was a blast. But yeah, that is not our topic today. Our topic today is Adrian. Today, let’s attack the sort of myth, I guess that owning a home is more difficult on average, than it was previously. There are some truth to this, right? We look back economically, there’s some times in the 60s and 70s, the classic model of you know, one breadwinner, supporting a family of four is maybe gone out the window. But in modern times, average household incomes relative to average mortgage payments based on average purchase prices, we’re going to be using some aggregate data here from across the country. And we’re going to show why it may be actually would you say more affordable at this point in time? Well, not necessarily more affordable, but definitely doable. And what we’re pulling from here, and this is something that and frankly, let’s do a warning to the audience, Adrian and I are gonna geek out a little bit today, right? numbers day, we’re using the affordability index. And our data comes from the National Association of Realtors, the for most of it. And there’s some different reports there they rely on Census Bureau information Bureau of Labor and Statistics, statistics, and different things like that. So enough remotely credible data source, oh, this isn’t some, you know, fly by night. clickbait article or something. This is data aggregated from real sales. Real consumer level data, right and and assuming we get permission from the National Association of Realtors to redistribute their document, you can always get the information from us reaching out to us. But we were considering just attaching the some of these reports to the podcast. We might not remember any of that. I know. But this is at the very least this is a peek behind the curtain. This is the data that your realtor, your realtor, if they’re good has access to and is using to help guide your decisions. Right. So about the affordability index, what is it, it’s basically measures whether or not a typical family could qualify for a mortgage loan on a typical home. A typical home is defined as the National median priced existing single family home as calculated by the Association realtors on the national level and we will be talking on the national level. Adrian, I happen to be in the Portland Oregon market. We’re licensed in Oregon to do what we do. But we’re going to talk on the national level specifically, again, we love sharing with our clients, the local information and so on. But this is this is conceptual. So we’re gonna go with the National, the typical family is defined as one earning the median family income as reported by the US Bureau of the Census. And we also have the prevailing mortgage interest rate is the effective rate on loans closed on existing homes from the Federal Housing Finance board. So that’s where we’re getting our sources of data. Yeah, and I think it’s important. Just to note, those are off of actual closed loans, that’s not advertised rates, which are often lower because they’re laden with points. This is what people actually close their loans with, and the rate that they’re actually paying,

Adrian 

right. So these components are basically put together and used to determine if the medium, medium income family can qualify for a mortgage on a typical home. Then, to interpret our numbers, the value of 100 means that the family with a median income has exactly enough income to qualify for a mortgage on the median priced home. So an index above 100 signifies that the family earning the median income has more than enough income to qualify for that mortgage loan on that medium price home. Also, the report assumes a 20% down payment. Now, we will meander in this conversation a little bit on the fact that Yeah, you can do 5% down, you can do 3%, down. Now mortgage insurance comes into play other things. And this is where we have those specific conversations with those specific buyers and sellers. In this case, more buyers, saying, Hey, what’s your situation doesn’t make sense to do a more expensive loan, you know, what’s your income? And we’re exploring the limits of what people can and can’t do? Yes, yeah, the only aside, I think I want to make there is that, yes. Using even a conservative appreciation rate of below 4%. Within five years, even if you started with a with 100% financing product, maybe it’s a downpayment assistance or USDA loan. Within five years, average appreciation has the home worth enough that you’re going to have 20% equity in that home. So if you’re listening to this, and your first time buyer, and you’re thinking this doesn’t apply to you, it will very rapidly so pay attention to this data, because it matters. Mortgage Insurance is 99% of the time temporary, even if you start with a product that doesn’t have cancelable mortgage insurance, we’ll talk about how you can refinance out of mortgage insurance. So it’s a it’s a temporary handicap to your you know, climb to millionaire status. And don’t let it get you down. This is data that you should definitely look at. Because it’s going to talk, you know, it’s going to work its way into what is the cash flow and profitability of owning one of these properties. Right. And then so so let’s, let’s jump into some numbers here. And let’s have fun with this. So Adrian, I know you know this answer, but let’s ask the audience. January, and this is projected numbers, but January of 2021. What was the average? Or the I’m sorry, the median price existing single family home across the US? across the US, I’m going to guess somewhere 300? Just under? Yep, there. Yeah, it was 308 301. That’s a little higher than was like, and those those May, those may be revised slightly, because you know, we’re only in March. But, and just just to give you an idea in December, it was 313. November of 2020 was 315. It actually peaked in October, interestingly enough at 370. Now this is across the country. So your local markets are going to vary greatly. And, frankly, you’re going to see in the Portland market, which Adrian and I know intimately, we’re going to be close to double the national numbers. In San Francisco, New York, LA, you’re going to be triple these numbers. So just just to give you, you guys an idea that the metros a little bit different of a beast. And I will just throw out there to us, just in case anyone’s thinking, oh, there’s a dip there does that is that mean that the market is has reached its CUSP? Nope, that’s the winter peak. So you know, we get our peak in the summer rather. And then we get the winter slope off. And then we see the kick back up in the spring. These numbers over time, you know, use zoom out, there’s going to be a larger slope and trend. But every time you zoom in every single summer and winter has the same cycle of nobody wants to move in the winter. Right comparatively, most people don’t that bias is present in the values. Exactly. So affordability from the affordability index. Going back to it only goes back to 1989. So Adrian, what do you think was and I know you’ve looked at some of this stuff, but what do you think was the 1989 average home price? single family? Oh, man, is it under 100,000? Is that right? Yep, it was 94,600. Wow. And the monthly mortgage rate? I have I have a guess at that. It’s gonna be in the teens for sure. Is it about 15? No, it wasn’t. This is 99. Oh, 8989. Yeah, in the early to mid 80s. It was I think it was close to like 16 18%. But yeah, I’ve heard that number thrown out a few times.

Adrian 

It was 10.1%. And by 1989. We were definitely in a reducing interest rate environment. Yeah, by 1990 it was 10.0 91 9.3 90 To 8.1, and it literally is in the seventh through 99, it bumped up to 8%, again in 2000. And then it rapidly started getting to 765. In 2005, it was 5.91. And then in oh six, it was 6.58. You know, 706 point five, two, and then it starts to go down again from 2008. And on. Do you remember the little thing that happened in 2007? actually happened in August, roughly? Now refresh my memory, I think. Um, so I don’t I, you know, ear muffs for the kids. But the housing market took a probably the biggest I’ll say, turd, how about that. So you can untie your ear off nice. dropped to the biggest turn that it has in? I don’t know probably since the Great Depression is Yeah, is what we’re talking about. And due to the the mortgage crisis, yeah, and that’s a whole different conversation. But the point is, is we peaked in August of oh seven. And it crashed pretty hard since then, to give you an idea, housing prices were at 217, nine on average, in oh seven, which shows actually a slight reduction from 2006, because half of the year was in the shitter. And the other half of the year was crazy, before it crashed. But then in eight, 910, and 11, we got all the way down from 279, in average house value across the country, down to 166, which was the trough in 11. Wild. And then it’s been gradually growing since 2011. So we’re only 10 years in, and we’re all the way back up over 300. The number was what December, January 313 308, something like that. Yeah. And I will say that is worsened a little bit by this concept that a lot of people held on to their homes at that time, right. And a lot of the sales that happened were people who were forced to sell who didn’t have another choice. So you will see an amplification there. That’s not to say that homes necessarily did devalue that much, right. But you got to look at the profile of the person who sold their house in that time. Right? And that’s a another episode for us. Yes, yeah. So going based on the averages, and you guys on the west coast and East Coast, New York, that sort of thing, I know, you guys are gonna laugh at the monthly payments. Okay. But I want to the goal of this affordability index concept is this, at the end of this, I want you guys to have in your head as an audience understanding of the fact that interest rate is just as big if not bigger of a driver of what you can afford from a house as price. Because they it’s, it’s it’s a lever. So let’s go back to the peak in 2007. And the average price was 217. Nine, your interest rate was 6.52. And your principal and interest payment was 1104. Let’s fast forward to 2012 where the average house was or 2011. I’m sorry, the trough 160 6200. So it dropped significantly. And interest rates for 4.67% rather than 6.5. And that payment was 687. So I mean, who wouldn’t want to do that? Right? What a great time to buy if you could Yeah, if you had $10 billion, you would have done the benefit of a time machine, you would go back and buy only houses and probably Bitcoin. But that’s anyway. So then fast forward to 2020. The average house November when we peaked of that year was 315, or October 315 370. I’m going to pick 317 800. So we’re a solid 50% higher plus at this point than where we were then right 166 200 to you know, three. So I hear that number, I might think the world stacked against me. Right? 50% gain, I didn’t make 50% more money from in the last 10 years. So what’s the deal? I can’t afford a house anymore? And the payment was 663, if you’ll remember, or six 660 368. Yeah, we went from from the elevens down to the sixes, right. But the interest rate was 2.88% in October of 20 2020.

Adrian 

So the monthly payment was 1056. So yes, it’s definitely quite a bit higher than it was in 2011. But we’re never going to see those values at least not unless there’s another crazy crash which we don’t necessarily see happening, but more lower up and down. lower than 2007. Exactly. That’s the point, even though appreciation happens and that money is worth less money. At the peak, it was 11. More amplified. Exactly. So the peak It was 1104 was the monthly payment principal and interest. And in 2020, it was 10. Let’s see October, here we go 1056 at 2.88% interest, versus 6.5. So almost double the price. And the payment was roughly the same, actually slightly less. So then we get over to the qualifying the median family income. So the median family income, and this is a combined household was in October of 2020 $84,672. And that’s all income in a household. So that’s typically dual earners. and unpack that for a second. Adrian, we talked about this a little bit off camera. Tell me about somebody who works in the fast food industry that’s worked there for 24 months, and is an achiever. What do they make? Yeah, I mean, literally, right now down the street from me, they’re hiring at McDonald’s for $15 an hour, we are an area with a higher cost of living. So it’s good that they’re offering a higher payment there. But even outside of that, you know, looking at aggregate data General Manager, assistant manager, which are achievable positions, for someone with the you know, the right skill set, Donald can be making, even at McDonald’s, yeah, 15 to ideally $20 an hour. And when we hit that $20 an hour mark, that’s kind of a magical one, because that’s, that’s 40,000 a year. So a couple making on average, $20 an hour working full time jobs should make together a combined income of $80,000 a year, which is more than the average family income. Right? There are people who work at McDonald’s who make more than the average family income. Now here’s what’s cool, based on where rates were, you know, dropping down into the twos in October of 2020, even though we were at 317,800. across the country for values. The affordability index, remember 100 being that the the median household income could afford the median house they could actually afford in October 1.67. Houses so or at the end, the affordability index was there for 160 7.0. So what what we’re trying to to make a point here and followed up and based on this data, is what does this look like for an average family? Yeah, is this doable? Embrapa for you get accused of cherry picking? I just want to throw it out there. 167 is that baseline? So in 2011? Yes, that number went up into even the 180s. But that’s, you know, again, that’s a very unique position. That’s just kind of like, there was almost a sale on houses at that time. Back in 2007, before the crash, it’s only at 115. Back in 2000. It’s at 120. Back in 1991. It’s at 110. So we are in relative to the times we are in a good time to buy a house representative as a portion of your income of the maximum that you can qualify for an average house with average income should be very, very achievable. So let’s let’s run across the line there in 1989. The median price single family home, you know, that was a that was an easier time to live, right? The math? Oh, things were cheaper back in the 80s. Okay, well, it’s 1989. That’s as far back as we can Well, you could buy a house for less than 100 grand Rob, that’s so cheap, exactly. 94,600, the monthly mortgage rate was 10.1%. The payment was 670. And that’s for principal and interest only. just clarify. So you do taxes and insurance but and remember, you’re putting 20% down very do this, but the family income average was $34,000.

Adrian 

So to be able to afford that average house, the affordability index comp composite was 106 point four. So the average family with the average income could only by the average house across this country 1.06 times so just they could just slip under under that radar. And this was one of my favorite data pieces off that to rob was the principal and interest at that time was 23.5% of that family income. Right. So they were spending, you know, somewhere between a fifth and a quarter of their income on the principal and interest payment right versus Fast forwarding to 2020, October. And that index? Well, the percentage was 15%. of 84,006 72. With the average home being 317. What once again, going back to this is the key, this is what keeps coming up here. Driver here is the interest rate was 2.88%. Which put us at the 1.66 1.67. of affordability index, you could the average family making the average income could afford 100 or 1.67. Homes versus 1.06. Yeah, so, and it goes up and down. And we won’t go through everything here. This is data that, you know, technically, if somebody else wants to get your numbers, yeah, that sort of thing. Awesome for our audience. But what we’re trying to say is, this starts to become a no brainer for us right now. Now, absolutely is the opportunity going to change, our rates gonna go up, of course, our interest rates in conforming, conforming loans, it is conforming loans, or a government subsidy through Fannie Mae, Freddie Mac, and all of that sort of thing. They’re only doable by the government basically creating a market and a market place within the function of Fannie Mae and Freddie Mac, to package up these these investments and sell them off in a secondary market. We won’t go through that if you want to see great movie, go watch The Big Short.

Yep, it’ll

Adrian 

highly recommend have lots of fun. But this concept is for now, and what our clients ask us all the time, Oh, is it a good time to buy? Oh, it’s overheated market?

Well,

Adrian 

maybe it is. Maybe it isn’t. But if you can lock in a payment for 30 years, and your rents are higher, which we don’t have time to go into on this, but if the rents cover your overhead, and then some Yeah, then yeah, no brainer. Yeah. And just because the needles dialing back, we’re seeing the two rates are maybe going to go away a little bit are going to get expensive. But you know, that that average rate paid even over these last, you know, we got three decades worth of data, the average rate doesn’t even dip below 4%. Right. So that’s, and that’s not that’s not true. It doesn’t 2016 for a hot second, but okay, you know, this is it, again, that number, the median payment, as a percentage of the median income is still staying below 20%. Since since 2008, so we’re still, you know, beating out the numbers that your your maybe it’s your parents, or maybe it was you who bought in the late 80s. You know, we’re paying as a portion of an average income, which means to me that this is more accessible. Most people that you know, the above the median should be in this affordability index. Right. And, and outstanding factor factors withstanding, right, so this is where, you know, like, let’s go to the west coast, right?

Obviously,

Adrian 

the average is well into the fours, closer to 500,000. Now, versus if you go to, you know, the southern region region of the United States, you know, it’s still well into the twos for an average home. You know, Midwest is low twos there. So, you know, northeast, it’s, of course, you have the New York market, and and the megalopolis that goes all the way down to DC, basically. But medium prices are in the the low threes. So yeah. And we can really dig into issues. I mean, in doing the research for putting together this episode we were looking at at Los Angeles, Los Angeles is crazy. Yeah, as far as the numbers, they just don’t make sense. Yeah. If you listen to data about some of these, these metro areas that are just they’re having a housing crisis right now, it is awful. But it is it is the exception. Sure. And it gets a lot of media attention. And we kind of this is part of this is just sort of dispelling that notion that that’s like a nationwide crisis. Again, the data speaks for itself, a median income can afford more than one and a half times, you know, in terms of qualifying for it, what the what the payments gonna end up being. And if you you pay your dues by paying your mortgage insurance, and eating that by having a lower down payment, even if you’re just starting out, you will climb your way up into being a 20% or in in short order within five years. Right. So just to give the audience some examples here. We went to realty hop.com to look at some indexes by city And like Los Angeles is, of course number one. In their average household income is shockingly low considering it’s LA. It’s just about 54 $55,000. The median home is 915,000. So your estimated mortgage and taxes monthly is 40 to 4300 a month and share of income for so you’re basically spending 93% of your income. Yeah, to make that payment. Sounds like the numbers might be a little off there. Someone’s filing in a different address. But Miami, New York, San Francisco, Oakland all have some of these same issues. I mean, the average home price in San Francisco is a million almost 1,000,004. So but in our advice, there is just Hi there 20 years ago. Yeah, exactly.

So it’s one of those. It’s one of those things, but the the point of this is yes. PDM might want to look closely at where they live.

Adrian 

Yeah. Check out your local market. Exactly. And get into the toxis. Talk to a lender, run the numbers you will not know until you have the numbers in front of you. But I hope that this spurs some people to go, you know what, maybe this isn’t as hard to afford, as I thought it was. Exactly. And that’s that’s the whole idea, the whole concept. There was a there was a story I wanted to tell. But actually, I think I’ll save it for another, another episode here. But it’s this is doable. It’s very doable in the Portland Oregon market. It’s very doable and is a hard one. It is a hard one. But in the majority, I would say of the top 100 markets across the country. It’s absolutely well in the top, say 8085 pretty easily, barring extenuating factors. And we’ll get into solutions to those if you’re buried in debt if your student loans are born out your nose if you got medical problems. You know, we will chew into that in later episodes. But again, for the median for the average for most families in America. This, this index should work out. Right. We’ll resolve your other problems as we go.

Right affordability index, this is probably as deep a dive as geeky as we get right Adrian?

Adrian 

I like the numbers. We’ll see. Yeah, they are fun. Thank Thank you everyone for listening to this episode. We look forward to the next one. And yeah, hopefully we we are providing value to all of you listeners. See you next time future millionaires.

Intro 

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