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Started By
Message
Homebuyers are now spending 40% of their gross income on mortgage and interest costs
Posted on 7/22/23 at 9:13 am
Posted on 7/22/23 at 9:13 am
A pretty good Twitter thread that explains what is happening and what the likely outcome will be except he doesn't even touch the issue that AirBNB failures are starting to hit the market driving up inventory and that will progress faster and faster.
I copied most of it here but I suggest reading his thread.
Is another Mortgage Crisis brewing?
Homebuyer Debt-to-Income Ratios (DTIs) are now approaching 40% in the beginning of 2023.
That means homebuyers are now spending 40% of their gross income on mortgage and interest costs.
Same level as 2006.
Also, the average downpayment for homebuyers over the last several years is actually LOWER than it was during the mid-2000s bubble.
The 2008 Housing Crash is constantly blamed on "bad mortgages".
Bad mortgages that everyone assures us aren't being issued anymore.
Yet somehow homebuyers are putting less money down, and taking on similar interest burden, in 2023 compared to 2006.
Which means there will inevitably be lots of foreclosures in this housing cycle.
All it will take is some economic turbulence and for the unemployment rate to rise meaningfully.
Then mortgage defaults will jump. As they always do.
But for now mortgage defaults are low because the unemployment rate is low.
And because people are finding ways to take out other forms of debt (credit cards, personal loans) to fund their spending and mortgage costs.
And really the big issue here is the US Government.
Particularly the FHA loan program.
These risky first-time homebuyer loans where people put only 3% down were a small share of market in the mid-2000s.
Much larger share of the market today.
The government continues to try to make it easier and easier for people with lower credit scores and without much money to buy houses.
With the FHA Homebuyer DTI increasing from 35% in 1997 all the way up to 44% in 2022.
And it's likely even higher in 2023.
Moreover - the overall level of mortgage interest debt as a % of gross disposable income is also near an all-time low today.
Causing some people to believe there won't be a crisis in the mortgage market.
However, the reason aggregate mortgage interest is lower is because the US population has aged significantly.
With more and more homeowners paying off their mortgage and owning free and clear.
There's approx 38 million houses in America with no mortgage today.
However, there are still nearly 60 million mortgages in America.
With many of those owners struggling to afford their payments (even if they have a "low rate").
About 14% of all houses have a rate below 3%.
Another 12 million houses in America are vacant for seasonal use, held off the market for rent, or kept as 2nd/3rd homes.
Meanwhile, houses listed for sale number only 614k acc to https://Realtor.com
Meaning that vacant homes outnumber listed homes by nearly 20:1.
All this is to say - there are lots of ways that inventory can increase significantly in the future.
Right now homes for sale acc to NAR are 50% below long-term average.
But it wouldn't take much mortgage distress and selling of vacant properties to cause a big spike.
And tying things back to the original point:
With nearly 60 million mortgages out there, and homebuyers over the last several years taking on sky-high interest payments and putting low money down, there is big potential for defaults and foreclosures.
These defaults and foreclosures won't be as bad as what happened in 2008.
But they don't need to be.
Inventory is so low that even a modest increase in defaults and foreclosures could cause a big downward shift in the market.
I'm fairly certain the average person has no idea that homebuyers in 2023 are taking out a similar level of debt as buyers in 2006.
That knowledge changes your perspective quite a bit on what's happening in this housing market, and the sustainability of low inventory.
Twitter thread with more info
I copied most of it here but I suggest reading his thread.
Is another Mortgage Crisis brewing?
Homebuyer Debt-to-Income Ratios (DTIs) are now approaching 40% in the beginning of 2023.
That means homebuyers are now spending 40% of their gross income on mortgage and interest costs.
Same level as 2006.
Also, the average downpayment for homebuyers over the last several years is actually LOWER than it was during the mid-2000s bubble.
The 2008 Housing Crash is constantly blamed on "bad mortgages".
Bad mortgages that everyone assures us aren't being issued anymore.
Yet somehow homebuyers are putting less money down, and taking on similar interest burden, in 2023 compared to 2006.
Which means there will inevitably be lots of foreclosures in this housing cycle.
All it will take is some economic turbulence and for the unemployment rate to rise meaningfully.
Then mortgage defaults will jump. As they always do.
But for now mortgage defaults are low because the unemployment rate is low.
And because people are finding ways to take out other forms of debt (credit cards, personal loans) to fund their spending and mortgage costs.
And really the big issue here is the US Government.
Particularly the FHA loan program.
These risky first-time homebuyer loans where people put only 3% down were a small share of market in the mid-2000s.
Much larger share of the market today.
The government continues to try to make it easier and easier for people with lower credit scores and without much money to buy houses.
With the FHA Homebuyer DTI increasing from 35% in 1997 all the way up to 44% in 2022.
And it's likely even higher in 2023.
Moreover - the overall level of mortgage interest debt as a % of gross disposable income is also near an all-time low today.
Causing some people to believe there won't be a crisis in the mortgage market.
However, the reason aggregate mortgage interest is lower is because the US population has aged significantly.
With more and more homeowners paying off their mortgage and owning free and clear.
There's approx 38 million houses in America with no mortgage today.
However, there are still nearly 60 million mortgages in America.
With many of those owners struggling to afford their payments (even if they have a "low rate").
About 14% of all houses have a rate below 3%.
Another 12 million houses in America are vacant for seasonal use, held off the market for rent, or kept as 2nd/3rd homes.
Meanwhile, houses listed for sale number only 614k acc to https://Realtor.com
Meaning that vacant homes outnumber listed homes by nearly 20:1.
All this is to say - there are lots of ways that inventory can increase significantly in the future.
Right now homes for sale acc to NAR are 50% below long-term average.
But it wouldn't take much mortgage distress and selling of vacant properties to cause a big spike.
And tying things back to the original point:
With nearly 60 million mortgages out there, and homebuyers over the last several years taking on sky-high interest payments and putting low money down, there is big potential for defaults and foreclosures.
These defaults and foreclosures won't be as bad as what happened in 2008.
But they don't need to be.
Inventory is so low that even a modest increase in defaults and foreclosures could cause a big downward shift in the market.
I'm fairly certain the average person has no idea that homebuyers in 2023 are taking out a similar level of debt as buyers in 2006.
That knowledge changes your perspective quite a bit on what's happening in this housing market, and the sustainability of low inventory.
Twitter thread with more info
Posted on 7/22/23 at 9:14 am to stout
Leave high-cost of living areas.
You can buy a house in Louisiana for 150k that’s 1.4 million in the Bay Area.
You can buy a house in Louisiana for 150k that’s 1.4 million in the Bay Area.
Posted on 7/22/23 at 9:16 am to stout
That’s nuts. We are at 10%. I’ll never understand overbuying on a home. Yeah it should appreciate… but you also gotta eat.
Posted on 7/22/23 at 9:16 am to stout
*Stout’s Depressing News of the Day*
Posted on 7/22/23 at 9:18 am to Tyga Woods
quote:
*Stout’s Depressing News of the Day*
I have another doozy about the car market dying. A lot of the same indicators we saw in the run-up to 2007-08 are there
Posted on 7/22/23 at 9:21 am to stout
quote:
I have another doozy about the car market dying.
frick it…let it loose
Posted on 7/22/23 at 9:22 am to stout
don’t buy a house you can’t afford
/fixed
/fixed
Posted on 7/22/23 at 9:22 am to stout
I think it has to do with people not wanting to make their towns desirable. Aka… not caring about local politics, moving to the area more covenant, and sometimes not taking pride. Its easier to move than to fix the issues
Money also helps
Money also helps
This post was edited on 7/22/23 at 9:23 am
Posted on 7/22/23 at 9:22 am to stout
quote:
About 14% of all houses have a rate below 3%.
Ours is 2.375%. It would sting to sell right now. I know we probably won't see those rates again though.
Posted on 7/22/23 at 9:23 am to stout
That’s insane. Their GROSS?!?
We make ~$12k/month gross. That’s around $4800/month on a mortgage?
Our mortgage is currently $1270/month. It WAS $1125 when we first purchased in 2020, but the county says my 1950 house is turning into luxury living or something. $1270 feels expensive. Can’t imagine pushing $5000.
We make ~$12k/month gross. That’s around $4800/month on a mortgage?
Our mortgage is currently $1270/month. It WAS $1125 when we first purchased in 2020, but the county says my 1950 house is turning into luxury living or something. $1270 feels expensive. Can’t imagine pushing $5000.
Posted on 7/22/23 at 9:23 am to fjlee90
We are at 10% of gross without taxes and insurance. 14% if you factor that in.
And that is not taking into account bonuses and stock options (treat as lagniappe) which would increase our gross income by 5,000 monthly.
And that is not taking into account bonuses and stock options (treat as lagniappe) which would increase our gross income by 5,000 monthly.
Posted on 7/22/23 at 9:24 am to stout
9.5% for us at 2.8% interest rate. Literally never moving...which I'm fine with.
Posted on 7/22/23 at 9:24 am to fallguy_1978
We are at 2.75%. No way I would sell.
Posted on 7/22/23 at 9:27 am to Boss
We are at 4% of gross with taxes and insurance. Our rate is below 3% but I don't know the exact number and I bought a hurricane-damaged house that I repaired and updated. The house was worth double what we had in it the day we moved in. We are very fortunate and I don't plan on selling.
Posted on 7/22/23 at 9:28 am to stout
That’s about right for me.
But the kicker is my monthly housing costs would only be marginally lower if I rented a basic 1 bedroom apartment not in the ghetto. Might as well get some equity into it.
But the kicker is my monthly housing costs would only be marginally lower if I rented a basic 1 bedroom apartment not in the ghetto. Might as well get some equity into it.
This post was edited on 7/22/23 at 9:31 am
Posted on 7/22/23 at 9:30 am to stout
So my question is this. Using history as a guide, if I have cash and am about to start shopping for a "forever home" in the next 6 months, what is my best play?
1. Buy now.
2. Rent something and wait for a potential crash? How long could that be? If there is a crash, what kind of advantage will cash give me? Is waiting going to be worth it?
3. If I wait and the market survives, what do I lose by waiting?
1. Buy now.
2. Rent something and wait for a potential crash? How long could that be? If there is a crash, what kind of advantage will cash give me? Is waiting going to be worth it?
3. If I wait and the market survives, what do I lose by waiting?
Posted on 7/22/23 at 9:31 am to stout
Not sure if people like me who own their home outright is factored in.
Posted on 7/22/23 at 9:32 am to stout
Rough math says we’re at ~16-17% on a 3.25 30-year
Bought in early 2022 before mortgages went nuts, guess we’re never moving even though I’m kinda ho-hum on this house.
Could be worse I guess, if we didn’t buy this one we would have been in trouble.
Bought in early 2022 before mortgages went nuts, guess we’re never moving even though I’m kinda ho-hum on this house.
Could be worse I guess, if we didn’t buy this one we would have been in trouble.
This post was edited on 7/22/23 at 9:33 am
Posted on 7/22/23 at 9:32 am to Undertow
quote:
But the kicker is my monthly housing costs would only be marginally lower if I rented. Might as well get some equity into it.
Yes that is the other issue but in smaller markets rental rates are dropping. It will spread soon as people take on roommates or move back in with family. Also, a lot of Airbnb houses will convert back to regular rentals causing surplus inventory in the rental market too.
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