If investors are wary about buying real estate, should homebuyers be wary, too? Home prices are rising. Here's how to tell if buying a home is still affordable for you.
The gold rush is nearly over. Real estate investors rescued housing from the recession by spending billions of dollars on cheap foreclosed homes and turning them into rentals. And now they’re pulling back.
A third of the homes for sale in 2009 were foreclosures. One in every four homebuyers was an investor then, according to the National Association of Realtors.
This September, with home prices up and the backlog of bargains shrunk nearly to nothing, investors were less than a fifth of buyers. Making a profit is getting harder.
“Buying investment homes has gone from a no-brainer to needing to think about it,” Walt Molony, NAR spokesman, told Money Talks News.
Investors’ new wariness reveals how the real estate market has changed. What’s it mean for the rest of us? If investors are wary about buying real estate, should homebuyers pull back, too?
Investors vs. homeowners
Higher prices are making investors conservative. CNBC says:
Prices are up more than 12 percent from a year ago, according to several reports, and the average rate on the 30-year fixed is a full percentage point higher than it was last spring. It is now far harder for the average U.S. household to afford a home.
In the West, hard hit by foreclosures and a magnet for investors, prices are up about 20 percent this year, says CNBC. Still, they’re not yet what they were at the top of the housing boom.
But investors are different from the rest of us. They buy homes for profit. Buyers in search of a home are looking for something else: shelter. And other things, like status, access to good schools, family stability and memories.
Your home is not an investment
That means homes are a consumer item for most of us. Maybe not exactly like a new car, but the point is, we buy homes for the experience — because they make us happy, not because they’re likely to make us richer.
You hear a lot about homes as investments. And you do hope yours will eventually sell for more than you paid for it. But, as the housing crash proved, there’s no guarantee that will happen. Given all you have to pour into owning a home — taxes, insurance, repairs, maintenance and upgrades — a net profit can be hard to achieve in the best of times.
That’s not to say you don’t have to be super smart about where and what you buy, how you buy it and how you pay for it. But, face it: Most of us aren’t investors. We’re real estate consumers and lovers. Big difference.
The question, then, is not whether you’ll make a killing from buying a home but whether, if you want one, you can afford it.
What’s an affordable home?
Affordability depends on what you earn and also, just as importantly, on where you live.
Several companies watch what’s happening to affordability around the U.S. To identify “affordable” cities, they see whether a family earning the median income in a town earns enough to put 20 percent down and qualify for a mortgage on a median-priced home there.
Jed Kolko, chief economist at Trulia, writes:
Nationally, home prices still look a bit below their long-term average, and mortgage rates are far below their historical norms – which means that buying a home is still cheaper today than during the housing bubble. But this national average hides enormous differences in what the middle class can afford in each local market.
Trulia’s study of “Most Affordable Housing Markets for the Middle Class” (scroll down the page for the list) found the 10 most affordable markets in smaller cities, mostly in the Midwest.
Trulia’s top three towns for affordability (Akron, Dayton and Toledo) are in Ohio. No. 10 is Birmingham, Ala. The least affordable markets for middle-class homeowners are in California (led by San Francisco,) the New York City area, Honolulu and Boston.
Interest.com takes a different approach, grading 25 large American cities. In 2012, Atlanta, Detroit and Minneapolis all got A’s. This year, no A’s were given, a sign of declining affordability across the country.
Calculate what works
What if you don’t live in one of the affordable cities, and you’re not able to relocate?
Wherever you live, you’ll gain a rough idea of what’s affordable for you with this rule of thumb: Your monthly housing expenses should be no more than 28 percent of your gross monthly income. Your total monthly debt payments (including housing expenses) should be no more than 36 percent of your gross monthly income. Wells Fargo tells how to make the calculations.
Also, you can get a general idea using an online calculator. Here’s one from Zillow.
Are you willing to move out of town to afford a home? Tell us about it in the comments below or on our Facebook page.