Affordability is a huge topic right now. It seems like most real estate articles are talking about how insanely “hot” the market is and how much values have increased. But as much as the public eats up sensational headlines, we all know affordability is becoming an issue too for both buyers and renters. Today I hoped we could kick around some trends in the market when it comes to affordability. Anything to add?
Wage growth and values: One of the red flags over the past five years is having so much growth in home prices and rents without much wage growth. This is why we see some buyers technically affording the market, but at times they have several different jobs to help make ends meet. We also see multiple renters shacking up together to help afford higher rents.
Looking beyond single family detached homes: As values have increased, some buyers are starting to look beyond the single family detached market to something they might be able to afford. Other options include condos, halfplexes (attached unit), or even mobile homes. These properties represent affordability to many because they are often listed toward the bottom of the price spectrum. For reference, right now there are 27 mobile homes listed for less than $50,000 in Sacramento County (located in a mobile home park). I wouldn’t say the mobile market is “on fire” by any stretch, but I have heard more chatter about them lately, which is surely a sign of the times. I know, if you buy in a trailer park you’ll have to deal with “trailer trash” comments, though for some a mobile home is a viable financial option to help pay down debt and hopefully avoid some of the crazy rent increases lately. Ultimately let’s continue to keep an eye on what’s happening at the bottom of the market.
Unrealistic buyer expectations: My sense is some prospective buyers have unrealistic expectations about the type of house they can purchase in today’s market. For instance, I heard someone recently talk about wanting something under $300,000 that was modern, newer, eco-friendly, and located in Midtown. The truth is a property like that doesn’t exist right now in that price range in Midtown. But does it exist somewhere else? That’s the real question buyers need to ask. Coming to terms with locations you can and cannot afford is not always easy, but it is necessary for those who choose to buy.
Why tiny homes mostly don’t work: We see tiny homes on HGTV and like to think they are a viable option for many buyers or even a solution to the housing shortage, but they aren’t usually attached to the land, which means they don’t qualify for traditional financing. Of course you can obtain financing for a tiny home with an RV loan or personal loan, but that’s going to be more expensive. Even if you have the cash or financing to buy a tiny home, one of the bigger problems is the cost of land. We have to remember when a market increases in value, it’s mostly the land that is becoming more valuable. And when a market declines, it’s the land more than anything that loses value. The glimmer of hope though for tiny homes is that Fresno passed an ordinance last year that allows residents to put tiny homes on their property and consider them permanent residences instead of just temporary. This means for those who cannot afford higher prices in the single family detached market, this might be an option so long as they have access to land (maybe in a family member’s backyard). By the way, there is a 360 sq ft home listed for sale right now in the Elmhurst neighborhood of Sacramento.
Storage container homes: The market seems hungry for alternative housing as long as it’s affordable, though the unfortunate thing about this type of housing is it’s not necessarily inexpensive because of the cost to build and the problem of finding affordable land. It may still be possible though to build a storage container development on tiny lots at a reduced cost compared to stick-built new construction. We have seen some storage container commercial developments come to town, but it seems pretty quiet as of yet for residential units. Anyway, this reminds us there is space in the single family market for someone to “crack the code” or think outside the box to figure out a way to bring alternative housing at a lower cost than stick-built new construction. The image below comes from a local storage container company called TAYNR.
The squeeze on supply: Some buyers really are getting priced out of the market, though the truth is we might not feel the effect of missing buyers dropping out of the game because of the reality of having a housing shortage.
Creativity: It seems like every week I’m hearing about a new 0% down or 1% down loan. Thus as affordability vanishes for some, lenders are slowly helping buyers artificially afford higher prices by making their loan products less expensive. Lenders have so much power right now to shape the future of the market by what they do in coming time. Let’s remember another “creative” aspect of the market is seeing appraisal waivers become more common. I get there is a place for that, though let’s be cautious.
Questions: Would you ever buy a tiny home or a mobile home? What else are you seeing out there? Did I miss anything? I’d love to hear your take.
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Thanks for the mention Ryan-
We’ve noticed a trend in the mobile home market where, even in all age parks, folks are feeling like they need to downsize and even consolidate households-
I know a lot of agents may bypass this sector and yet it certainly deserves some attention-
Almost a third of our buyers are a good fit for this type of housing and 20% of my team’s listings are now comprised of mobile/manufactured home units…
We are excited to provide knowledge and expertise in this particular arena. Great article Ryan! Thanks for all the extra value you bring to our industry!
Right on Rachel. Thanks for the kind words and for being okay with me using your photo too. There is definitely a market for these types of properties. I think you are absolutely correct. I would think this sub-market would only get “hotter” so to speak as values at the bottom increase. If I’m not mistaken ground rent is $495 in this complex. Thus if a buyer pays cash for the unit, that’s pretty cheap rent over time. You can’t beat $495 almost anywhere in Sacramento.
Ryan, as usual, fantastic post!
Just some random musings…
1) I am seeing a lot of new construction in Rocklin and Roseville, but those homes are not aimed at the typical “first-time-buyer” market. A lot of them are 400K+. So, builders are building, but affordability is still an issue. Maybe if those proposed 10K units in Folsom go up, they might make a dent!
2) Appraisers should be aware of the “tiny home” movement–especially if they become legally recognized as permanent residences. They could eventually be more than a niche in the market–especially in areas with insanely high real estate prices.
3) Storage container homes and tiny homes will present some challenges to appraisers in knowing what is “up-to-code” and what the deterioration/depreciation rates are.
4) Voice of Appraisal podcast noted that a lot of REOs are no longer going on the market but are being sold without an auction. REOs were a way for first time buyers to get into the real estate game. Might be worth another post by you!
5) The 0% down loans are insane. Have we learned nothing from the last meltdown? If someone cannot afford a down payment, you are just asking for problems should they lose their job or have medical problems. Where is the cushion? Also, I have recently been solicited the same properties from multiple AMCs. Lenders are squeezing appraisers to keep costs down, further undermining the risk assessment process since the cheapest appraisal is seldom the best appraisal…
Abdur, thanks for your insight. I always appreciate your commentary. It helps make the post better.
I think you have a good point about new construction. Philosophically we have to realize new construction is simply less affordable anyway since these units often sell 10-20% more just because they are brand spankin’ new. Thus if a buyer is looking for something affordable, it’s probably best to stick with older housing stock, no? Moreover, builders don’t have much incentive to build and sell for cheap because it is really expensive to build. This is why we don’t see small homes being built in subdivision (despite many articles talking about how smaller is all the rage).
I agree with you about paying attention to tiny homes. I’m very excited to appraise them as well as storage container units. The real estate geek in me can’t wait. Though unfortunately so many alternative units like this don’t end up being attached to the land, and right now I don’t do personal property appraisals (only real estate). I did actually speak with the storage container company I mentioned above via email yesterday and I’m excited they are doing an install right now in a Sacramento neighborhood. If they let me, I’d love to follow their journey and do a post on it because it’s fascinating to consider how housing changes and even how a tight market can end up putting pressure on laws to change and the type of properties that exist. Let’s pay attention.
It’s difficult to know what lenders are doing with their REOs. If they are selling them, they certainly aren’t doing it on MLS. I’ll share an updated REO graph next month after the quarter ends, but it’s going to show probably less than 3% of all sales last quarter as REOs. Does anyone have insider knowledge as to what is happening behind the scenes? I’m not looking for what people think is happening, but inside stories as to what someone knows is happening. I just know banks are absolutely not hitting the market with their distressed inventory in mass by any stretch. Thus despite the promised “wave”, we just aren’t seeing it show up on MLS. There were definitely off-market deals happening during 2012 and 2013. Are they happening now? Not sure.
Great post, Ryan! So applicable for here in North Texas. Home prices have been increasing but we are not seeing the same % increase in wage growth. One of the reasons many businesses have relocated to this area was because of housing affordability, however, with the increase in demand and our inability to keep inventory, we are quickly losing the affordability as the imbalance in supply and demand are driving prices upward.
Also, I notice in our markets that we seem to be losing the “starter home”. My own kids, who are millennials, are graduating with college degrees and are having a difficult time finding places to rent or buy with their starting salaries.
Interesting information about tiny homes. We do not see many of those around here. Of course, it is Texas where we tend to like everything big!
Thanks Shannon. That’s really interesting to hear. We have so many Californians leaving for Texas. They sell here and are coming with fat stacks of cash ready to buy. I have to think that only drives up prices. I know someone who sold in 2002 in Southern California for $700,000 and then bought an enormous new property for under $300,000. Worked out well for them.
I share your concerns about the starter home. My kids are only in middle school, but I’m wondering if they’ll stay in California (just remember kids, free babysitting when you have kids….).
Great post as always Ryan.
I’ve got something to add regarding the comments on no and low down mortgages. I for one don’t see those loans as high risk. (Given the right buyer type)
I totally agree with the fact that loose lending guidelines caused us problems in the past but the low down payment was less of a problem than the terms in my opinion. Neg-Am and ARM’s with pre-pay penalties are the type of loans that get people in trouble when a mortgage payment can increase 50-100% in the course of 5 years. I am certainly against those.
But in the case of a well qualified borrower financing a home with 100% financing on a fixed rate mortgage I think there is a true need and I think this is less risk than many of the 3.5% down FHA loans that are written.
Imagine this scenario:
2 working parents that make combined income of $100k. Stable jobs with the state, 750 credit scores. They have monthly expenses, including daycare, student loans, etc. They may not have the money to do the down payment but they’ve been paying on time rent payments of $2000/mo for 5 years so they are pretty low risk.
These are the types of folks I wish I had more options for. Not state sponsored down payment assistance programs but a nice 0% down product from Fannie/Freddie. I mean how much do they think the 3% skin in the game makes a difference?
On the flip side FHA is happy to lend to a couple straddled in debt, 580 credit score, collections, late payments. A “gift” of 3.5% down from a family member and no personal skin in the game.
Thank you Matt. I value your opinion and I appreciate you pitching in some thoughts here.
Some people say buyers need to be putting down 10-20%, but that’s not so easy in California and is not realistic for many buyers. Does that mean they shouldn’t buy? I suppose the answer is going to depend on who you talk to. I will say it’s not so easy with student debt these days for younger buyers in particular, which is why I’m a fan of lenders considering the total package and not overly-penalizing buyers because they paid for an education. We simply live in a different world today compared with 50 years ago. When our parents and grandparents put 20% down, they certainly didn’t have the burden of student loans, astronomical healthcare costs, and having to save much more intently for retirement too. It’s just different today.
The interesting part to me in this whole thing is how lending has changed since the “bubble” burst. Loans were extremely risky from 2003 to 2006, but then financing really tightened up as it should have. It seemed like there was the 10% conventional in 2007 if I remember correctly, then 5% conventional, then 3% conventional, now 1% or even 0%. Thus we see a progression of loosening things up. FHA lower FICO scores is certainly another example. When values increase, there are things lenders can do to keep making as much money as possible and keep buyers affording higher prices.
In Portland we have a push for accessory units, but that has not resulted in more housing affordability. Those units end up being used by family members, guests, or vacation rentals.
Thanks Gary. It’s easy to think these types of units will solve the housing problem. I get the sentiment of that in theory. I suppose if people built them in mass and locals were living in them, it would help alleviate some stress on the rental market by increasing supply out there. Though it would have to be a HUGE number of units to really make a dent in the problem of low inventory. And like you said, sometimes they just turn into vacation rentals or exist for family members visiting town. I imagine the AirBNB market is an option many people to use too. The beauty of a system like that is an accessory unit could be open to family whenever the owner wanted, but also open to being rented too. Thanks again.
Great post, Ryan. It’s interesting to hear about the mobile home market in California. While we have an abundance of mobile homes in my area I don’t think they are showing up on the radar yet as an affordable alternative to increasing prices. We do have a lot of garden home communities that offer more reasonable prices to those entering the housing market. In addition to that we have had an increase in the condo market in the downtown Birmingham area that is being gobbled up by millennials who are not ready for the suburbs yet. The container market will be worth following to see the creativity in design as well as where they will be put.
Thanks Tom. It sounds like you are in touch with your market. Knowing what people are buying and why they are buying it is very key to understanding housing.
As a side note, the storage container company I mentioned above (TAYNR) sent me a link a few days ago. It turns out there is a storage container community being built in North Sacramento right now. The story was very thin in terms of details, but it sounds like it will be 50 units. I’m not sure if the units will actually be attached to the land or not. http://www.abc10.com/mb/news/local/sacramento/tiny-home-community-in-the-works-in-north-sacramento/453226846
Actually, I tried to talk my gal into buying a mobile home about a year ago. I told her we could just buy one cash, then only have to pay the lot rent, and save $1,000+ per month 🙂
BUT – she wasn’t having it lol. I don’t think it’s a bad option at all if it’s all you can afford, as it’s certainly a better deal than renting most places.
But if you can afford a house, you stand to gain all the appreciation (which is a lot here in CA) and would be missing out on that if you opted for a mobile home instead.
As for Tiny Homes, I just think it’s dumb. Millennials are embracing being broke lol. If the only way you can afford to live in SoCal is to put a tiny home on your parents property, maybe you should move to a more affordable location. Just my 2 cents.
Thanks Wes. I always appreciate your take and insight. You are a smart man to listen to your lady. 🙂
Southern CA is so expensive. I just got back from visiting family in a certain city by the beach and it’s unreal to see what rents are. I don’t know how young people make it. This is why young married couples can basically only afford a condo (if they are lucky). I think moving to an affordable location is a very realistic thing to do for many. This in fact is why buyers from the Bay Area are flocking to Sacramento.