It’s no secret that the news headlines since receiving word that the mortgage rates have decreased under X amount since Y time has been creating a lot of chaos and urgency with buyers and sellers across the nation, the question that arises is, is any of this information valid? Or is the media doing a great job at creating that FOMO effect? Let’s talk about it (but it smells like fomo).
When it comes to buying and selling a home, the biggest aspect that’s on most people’s radars due to mainstream media are the mortgage rates, where are they at, when are they going down, and how does this affect affordability?
Definitely some understandable questions to be asking. And before I get into the meat and potatoes of this, it’s important to realize and understand, the best time to buy a home is when you’re ready financially and emotionally. Timing the market for the perfect time to buy a home will take a lifetime. You could wait a year for the mortgage rates to go down, now the home prices are up, you could wait 2 years for the prices to go down, now the rates are up, now a gallon of milk is $15 and gas is $8 a gallon, and the swine flu added an extra 0 to the list prices. There’s just too many factors in play that not only encompasses home prices, but the cost of living in general, which would throw off any rule of thumb used in budgeting which I will touch more on later.
What a lot of professionals are forecasting is if the FED’s do some drastic rate cuts like they plan to, this is going to build up demand once more and drive prices up just as it did throughout the pandemic market, and the possibility is definitely there based on how the buyer behavior was over the past few years even if the math didn’t quite make sense with how much people were bidding over asking price.
But if there’s one thing to takeaway from the housing market these past few years is people buy and sell real estate regardless of the housing market conditions, due to life changes. So this pent up demand that is projected to happen with the lowering of interest rates, may or may not be as overwhelming as we think, being as serious buyers are buying now regardless, but another thing I have noticed is yes there’s a lot of homeowners right now with a mortgage rate we would all kill for, they love that rate, but they don’t love the home they are in. So I have a firm belief, those homeowners are itching to make a change, or maybe it’s something that should be checked out by a doctor I don’t know. Nonetheless, with all the recent news, the mortgage rate fluctuations have created this hardcore FOMO effect that is worth breaking down in more detail.
Forbes advisor put out an article the other day compiling all of the experts forecasts for mortgage rates in 2024, from the national association of realtors, mortgage bankers association, to presidents and chief investment officers of big banks and firms.
Their consensus is that mortgage rates will start in the 7% range and descend toward 6-6.5% in the spring of 2024. With that in mind, how will that stand based on affordability? With this chart provided by the MLS showing the average sale price of just under $300,000 for the whole region, I'll break down a quick example. Let’s say you bought a $300,000 home with a down payment of 6% (the average down payment amount across the nation), that would be $18,000, and a interest rate of 7.5%, the mortgage payment for just the principal and interest would be $1,971 a month, but on the other hand, if the mortgage rate did go down to 6%, that same $300,000 home with a $18,000 down payment the principal and interest would be $1,690 a month. Assuming these are both 30 year fixed loans, the total cost of the loan would be $710,618 with an interest rate of 7.5% and the total cost of the loan with a 6% interest rate would be $609,136. So in a long term perspective you’d be saving quite a bit of money with that 1.5% difference in the interest rate, but with the average lifespan of a 30 year mortgage being 7-10 years, the amortization schedule is typically something left in the closing folder and never looked at again, unless you plan to live in your home until 2053 of course.
The reality is, if you spend any time playing around on a mortgage calculator, plugging in your income, the down payment, the interest rate and any other information you know about the home or area of interest that will help you fill out the blanks, a good rule of thumb is that your mortgage payment should not exceed 30% of your net income. So let’s say you net $80,000 a year, multiply that by 0.30, you would get $24,000, which you would then divide by 12 to determine how much of your income goes toward housing each month, which comes out to $2,000. With a $1,690 or $1,971 mortgage payment from the examples earlier, this falls right within that 30% parameter, but keep in mind this is based on your net income, not your gross. Let’s say before your expenses, your income is 20% higher. That’d be a gross income of $100,000. And I know what you’re thinking, this example was based on a $300,000 house, and that my friends is where the problem lies. The fact that you would need to make that much money just to afford what would be a starter home or fixer upper in most housing markets is sickening. I remember when I was a kid thinking $100,000 was a lot, but for some reason in this world we live in it seems like monopoly money.
The 30% Rule
For the 30% rule, keep in mind there’s also a lot of people who don’t believe in the 30% rule anymore, saying it’s outdated, and not accurate with the times, but one thing that’s timeless about it, is it creates the best safety net possible for you so you aren’t stretching yourself too thin, especially when you get your pre-approval back and you can afford a home $200,000 more than what you thought, but you’d be eating rice krispie treats and ramen noodles for every meal, so how beneficial is that really?
THE 50/30/20 RULE
If not the 30% rule, you may be coming across rules like the 50/30/20, which puts 50% of your after tax income on your must haves and must do’s, 30% on things you want and 20% on savings and debt repayment. So in simple terms, 50% is rent, utilities and groceries, 30% is for date nights and vacations and 20% goes into your retirement accounts and paying off your mounds of credit card debt.
OTHER BUDGETING TACTICS
Others will do spreadsheets and just throw whatever remains in a house and emergency fund, or maybe you just create your own rule of thumb for your lifestyle, however you spin it, just understand that if there’s no room to financially breath when you are clicking around a mortgage calculator after you deduct the mortgage payment form your income, you need to rethink that. Rules of thumb are made to be tweaked, but are also guidelines that give you the most wiggle room so they can cater to the masses. In Michigan, the median household income is roughly $75,470. So these mortgage rates and home prices are going to have to drop significantly for that balance beam we’ve been standing on these last few years to level out. Of course we all know that and it seems obvious, despite the government intervention thinking they can just increase and decrease rates and it would be the cure all. The reality is, the income to cost of living ratio gap is so grossly out of whack that until that happens, actual affordability won’t be a thing.
I was doing a little more digging and saw this analysis provided by JPMorgan which broke down exactly when homes would be affordable again, and basing this analysis on historical ratios of home prices to income, and the mortgage rates. If incomes grew at their recent pace, and mortgage rates stayed the same and home values just didn’t decrease, it would take about 3.5 years for everything to be NSYNC like Justin Timberlake.
Despite this analysis, the takeaway they wanted to mention is If you are looking to buy a house in the United States, don’t wait for, or expect, a home price crash. Sources don’t foresee one coming (thankfully), nor do they think one is necessary to restore affordability at the national level. They think time and continued robust income growth can cure the problem on their own.
What they also included in this article which I found interesting, is graphs of the variation in regional markets based on nominal house price growth from February 2020 to October 2023, which places these areas in 4 different segments: boom-bust (meaning the market boomed and then bust or depreciated), no boom but still a bust, boom-no bust, then no boom no bust, which is where the Detroit area landed itself, and it being one of the few metro areas that has been restored based on the assumptions of no change in mortgage rate and an assumption for a 1% drop in mortgage rate. Of course, the restoration of affordability differs city to city, but it gives outsiders a good idea about what the Detroit region’s housing market looks like post pandemic, but don’t think that covers the whole southeast Region as there are several cities that have had significant price increases since the pandemic.
For those of you that are sitting on the sidelines right now trying to figure out when would be a good time to buy, what has been holding you up? Drop your thoughts in the comments below.
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If you need help buying, selling or investing in the wonderful state of Michigan, please don’t hesitate to reach out and I would be happy to be your go to resource! Stick around for the next video, that stats now!
Cheers,
Andrew
Andrew McManamon is a Michigan REALTOR® with Signature Sotheby’s International Realty and provides real estate services to Buyers, Sellers and Investors throughout SE Michigan including Livingston County, Oakland County, Washtenaw County, Genesee County & beyond. Andrew has become one of the rising stars of Michigan real estate agents. Prior to his real estate career Andrew was responsible for managing a senior living facility in Brighton, Michigan as a dining supervisor and an activities assistant. Andrew’s passion to help people is unlike any other, and he continues to strive to be best resource he can be. Andrew graduated from Cleary University in Howell, Michigan with a double major and currently resides in Brighton, Michigan.
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