Years-to-save: the long, and longer, work of first time buyers
Low mortgage rates support monthly affordability, but rapid appreciation pushes the down payment out of reach
For those that have to save money the long, hard way out of their finely-tuned monthly budget, down payment affordability has eroded faster than at any other time in history. You can chalk it up to a housing market set to soar — even before the global pandemic — and record low interest rates. The calculus for home buying has changed (the headlines almost write themselves), but sometimes it takes running the numbers to get what it all means.
Monthly appreciation spiked nationally in June to 2.1% — a never before seen magnitude. Annualize it and you’re looking at 28%. Shocking. But putting that appreciation into the context is even more striking than the historical record breaking.
Let’s say you’re a Boise metro local hoping to buy your first home and you’ve been saving up the hard, deliberate way for years. You socked away 10% of your income every month — a super aggressive savings rate and by this June you did it! You had 20% down on the typical home ($430K at the end of May). But then the reality of competition in this modern housing market hits.
The typical home in Boise went from $430K to $450K over June. To maintain than 20% down on the typical home, you would have to somehow find another $4K — that’s over 6 months worth of saving 10% of local income ($71.8K annually, so just under $6K a month) just to keep up with the appreciation over June. That or save over 60% of your income. Either way, a practical impossibility. So you’ll have to lower your down payment share and explore other options to compete against other buyers.
First-time buyers in other metros with severe appreciation or pre-existing high price-to-income ratios experienced a similar crunch. Monthly appreciation exceeded 3% in June in Austin, Salt Lake City, Phoenix and Seattle metros — that’s over 45% annualized. Using local median household incomes, buyers would somehow need to find 5.3, 4.2, 4.1, or 3.5 extra months of savings to keep up with appreciation over June, respectively.
Even under more mild appreciation, when home prices are already big relative to incomes, households will need to ratchet up the savings rate to keep up. Monthly appreciation in June was “only” 1.9% (still 25% annualized) in the Miami metro, but you still needed twice as much time to save than you had.
Now of course, you can aim for a lower down payment share (and higher loan to value ratio). Heads up on the trade-offs either way. Competition between buyers for limited inventory has been fierce during the pandemic. In that kind of situation the seller is presented with multiple buyers to choose from. The competitive advantage in the bidding war can go to the buyer who can bring the most cash to the table — a blunt signal that the buyer’s financing and closing will go smoothly. Larger down payments also mean better mortgage rates — under 20% down and you’ll need to pay primary mortgage insurance too.
While the market has demonstrated some signs of a coming slow down, and the fed will certainly cautiously unwind it’s support and let interest rates start to rise, U.S. housing markets remain hot and the years-to-save will continue to grow.
Introducing years-to-save
Unfortunately for first-time buyers, June’s home value appreciation was a strikingly severe month after several months of extreme price growth. The years-to-save — the total amount of time it takes to save 20 percent down with 10 percent of local median household income, increased by two years or more since the start of the pandemic in Austin (8 to 10.1 years), Boise (9.3 to 12.5 years), San Diego (14.6 to 16.8 years), and Los Angeles metros (17.3 to 19.2 years — almost two decades of aggressive saving).
Metro areas with strong population growth over 2019 but with a years-to-save still shorter than the nation (for now), include Indianapolis (6.2 years) and Texas metros (other than Austin). Years-to-save in June 2021 is estimated at 6.6, 6.9, and 7.2 years for Houston, San Antonio, and Dallas, respectively.
Though we can’t promise prices will fall from these heights any time soon — especially in the most competitive markets, we do see signs that June’s numbers may be the worst we see. (See July Competition Report.) July home sales slowed by more than the rate of new listings, which is being pulled forward into the fall season perhaps in response to these price spikes or in anticipation of losing forbearance for those still unemployed and struggling. Even more relevant, the share of listings with a price cut, still much lower than normal at 6.6%, came up faster over July than was typical for seasonality pre-pandemic.
Not the avocado toast
One of the most upsetting realities for millennials, brought into even starker relief during the pandemic, is how much harder major milestones will be for younger generations.
In metros classically supported by manufacturing and other blue collar industries, employment and population growth over the past couple of decades have been moderate, if not negative, leading to minimal growth in home values relative to incomes. In these areas, such as Chicago, Detroit and Cincinnati, the years-to-save metric has hardly changed in all that time.
On average nationally, however, you’re looking at a 1.8 year increase since the early 2000s — perhaps not enough to keep you from managing it eventually, but enough to delay homeownership. Two decades ago (June 2001), with national incomes and home values prevailing at the time, you would be looking at only 6.1 years of aggressive saving. Today, with the same savings rate (still assuming 10%) but today’s incomes and home values, it will take you 7.9 years.
Many of the same metros discussed above for their rapid appreciation and prohibitive down payments during the pandemic are the same places that were experiencing growing pains beforehand. Almost all California metros, and Miami, FL, require an additional 5 years of savings at least. Austin, Phoenix, Denver, Seattle, and Portland all require an extra 4 years or more.
It’s important to recognize that these delays assume adult households today can and do save as much out of their income as those two decades ago. With eroding rent affordability and rising college tuition, it’s arguable whether today’s first-time buyer is able to match the savings rates of previous generations, even should they wish to. Also, we assume 10 percent down payment savings a month through time because it’s a big, nice round number in this thought experiment. Pre-pandemic, the average household savings rate for everything (retirement, down payments, emergencies, etc) was only 7.3%. Simply double the numbers if you expect 5% of income every month towards you down payment is feasible.
Record low rates: a saving grace for monthly affordability during a time of rapid appreciation
Low rates offer irrefutable affordability support (as well as leveraged investment potential and a hedge against inflation) to an otherwise impossible situation for home buyers. Even with rapid appreciation in home price, because mortgage rates have gone so incredibly low to offset it, mortgage payments have remained on par with pre-pandemic levels.
Take the value of a typical home in the Dallas Metro, $273K — only $1,000 higher than the national average. Due to the mechanics of a 30-year mortgage, at current historically low rates, a 10% jump in home price would only increase the mortgage payment by 1.5%. That’s the insulating power of the 30-year fixed rate mortgage.
Protected by historically low rates and the long loan term that spreads the payment out over 30-years, even with aggressive appreciation, the mortgage payment on the typical home took up only 15.9% of the typical US household income in June 2021, marginally up from 15.3% in January 2020, despite home prices jumping over 15% during that same period.
While rates stay low, they can continue to do the hard work of offsetting recent price gains when it comes to mortgage payments and monthly affordability.
How big is the appreciation on my house? Making sense of the difference between popular home price indices.
Our estimate for typical home value is an average of other estimates of metro level home values that each have their different strengths and weaknesses, are both trusted by academic researchers, and yet have very different magnitudes of change lately — (1) the ZHVI, a value weighted repeat-AVM index focuses on a middle-tier sample and is dollar denominated by chaining back from the most recent middle tier average AVM value, and (2) the FHFA Home Price Index, a stock-weighted, repeat sales index produced by the FHFA. (We denominated the FHFA index before averaging it with the ZHVI. This is done by pegging the value of the index on June 30, 2017 to the metro median reported home value from the 2019 5-year American Community Survey sample and chaining backwards and forwards with the FHFA HPI.)
When home price pressure varies systematically across the price distribution, these home price indices will present systematically different magnitudes according to their design, plus randomness. See the graphic below.
Our blended, “wisdom-of-crowds” style measure for the typical value of housing in a metro draws on the benefits from the ZHVI’s advanced technologies that enable it to incorporate more data and information about the market while tempering the over-emphasis Zillow places on the higher-end side of middle-tier homes, the very segment experiencing the most heat during the pandemic. Because of how it’s made, specifically it’s value weighting, using the appreciation numbers from the ZHVI to apply to housing in a different segment will likely overshoot significantly at this volatile time.
The stock weighting of the FHFA HPI mitigates this problem. However, the repeat sales index methodology is limited from incorporating newer homes or smaller geographies by requiring two sales per property (i.e. a repeat sale).
We do not add the S&P/Case-Shiller HPI to our blend. It has roughly the same methodology and sample as the FHFA index, but like the ZHVI is also value weighted and so over values higher end homes from the perspective of the typical buyer. In this case, however, the value weighting is even more detrimental since they use the full distribution.
We should qualify that value weighting has a legit purpose. It’s what you do when you want to treat the set of homes like a portfolio and watch how the value of the portfolio changes over time. It’s just not what you would do to track the experience of a typical home.
