Real estate has become a popular conversation as home prices are increasing dramatically. Some people believe that the market is ripe for a correction, while others are jumping in to take advantage of low interest rates. Current homeowners who were still working during the pandemic made out the best, as they could refinance their homes at ridiculously low rates and most likely paid less for their home years ago. New home buyers got the same ridiculously low rates; however, they paid a significant premium to purchase the home as the market is highly competitive.
Case-Shiller National Home Price Index
The Case-Shiller National Home Price Index measures the resale values of single-family housing across the United States. It does not measure new home sales, multi-family apartments, and co-ops. According to the CSI, home prices surged over 14.5% since January 2020. This is one of the most significant increases since the inception of the index. COVID has increased the demand for single-family homes for various reasons that we all are aware of.
Personal Debt Ratios
The impact of rising rates hurts people’s ability to qualify for a mortgage. Lenders routinely use the debt-to-income (DTI) ratio. DTI is the percentage of income required to pay all your monthly debt obligations such as student loans, car loans, credit cards, etc. In a perfect world, they like to see this number less than 36%. Mortgage debt should be approximately 28% of your gross pay. In high-cost states, such as California, it would be hard to stay within these parameters. When mortgage rates start to rise, it becomes more challenging to qualify for a mortgage.
The chart below demonstrates how much income a household needs to qualify for a median California home worth ~$760K, including taxes and insurance. According to Bloomberg, rates got down to 2.85% without points, so family income would need to be $139K just to cover the mortgage. If interest rates rise to the 12/31/2019 level of 3.78%, family income would need to be $153K or 14K more per year. In this case, the pool of potential buyers would shrink; however, each home only needs one high bidder to sell. Single-family homes may go down slightly or stay flat, but I don’t think a crash is on the horizon.
ETF of the Week
iShares Core Small Capitalized ETF (IJR)was the best performing ETF last week at 4.36%. IJR invests in companies with a market capitalization of $600 million to $2.4 billion. Small Capitalized Stocks are much more volatile than Large Cap Stocks.