The Price of Shelter—A Tale of Two Houses

_HOUSEThe first house shown is located in a so-so neighborhood in Los Angeles, zip code 90018. It was built in 1927, has 2 bedrooms, 1 bath, one-car detached garage and 1147 square feet. It is currently listed on Zillow.com for $364,376. If you wanted to buy and finance it, you would need 20 percent down, or almost $73,000, your need a credit score of 720-739 for a 30-year fixed rate loan, paying around $1413 a month at around 4 percent interest. This house is valued at around $313 per square foot.

The next house is located in Amarillo, Texas, zip code 79124,—in a “fancy” neighborhood, built in 2013, has 3 bedrooms, 3 baths, 2715 square feet, a four car garage, every type of upgraded appliances, Jacuzzi, and fireplace. It is also currently listed on Zillow.com for $365,000. This house is valued at around $134 per square foot. Financing would be similar to buying the Los Angeles house– about the same amount down with same credit score.

As the old saying goes, “location, location, location.” The first house is the reason why folks can sell their moderate to shabby house in a place like Los Angeles, then move to Amarillo and pay cash for the second house. The Los Angeles house, if sold in Amarillo, might be listed for around $55,000 on a good day. (It would be worth less than the down payment to buy it in Los Angeles.) The Amarillo house in Los Angeles, at $313 per square foot, would list for around a million dollars.

Welcome to America and the “wide world of real estate values.” Who on earth would pay $364,376 for the first house? Lots of people have paid more than the asking price for this house one or two streets over from this house. Zillow.com says that the Los Angeles house would rent for around $2100 a month. The Amarillo house, around $1000 a month—probably a little more—for a whole lot more.

Welcome to future homeownership for the next generation of homeowners. In the future a whole swath of people won’t be able to buy a house in America for a lot of reasons—including the new world of down payment—20 percent, and FICO—credit score requirements. Even around Amarillo a lot of people won’t be able to buy their own home. They will be stuck paying increasingly higher rent. I have been shocked at what some poor people in Amarillo are paying to rent shabby houses. But, Amarillo landlords are shrewd enough to “cash in” on the current housing situation where so many people cannot afford to buy their own homes. In the future rents will go even higher. The average $8-9 an hour wage earner cannot possibly afford to buy a house. At, let’s say, even $10 an hour, this comes to a monthly salary of around $1600 a month or a little under $20,000 a year. The rule used to be that the amount of house you can afford is roughly 3 times your annual salary. This means that a $10 an hour wage earner in Amarillo should be able to buy a $60,000 house. Now factor in the 20 percent down payment of $12,000 and you see the problem. Assuming the average household income in Amarillo is around $47,000, using more than one household income, this means that this multiple income family should be able to buy a $150,000 house—at least on paper, but again the down payment would be 20 percent or $30,000.

So who will be able to buy a house in the future? A house payment, or rent, should not be more than one-third of total monthly income, then add food, transportation (car payment, car insurance, gas and maintenance), then add a whole bunch of other expenses, clothing, kids stuff, medicine, entertainment and miscellaneous items. Right now many people are barely making it from paycheck to paycheck, not to mention saving to buy a house. I’m guessing with the higher rents in Amarillo that most renters are paying more than one-third of their monthly income for rent. So in order to qualify for the Los Angeles or Amarillo house, selling for $365,000, the buyer would need to earn around $122,000 a year, plus come up with a $73,000 down payment. How many jobs in Amarillo pay $122,000 a year? Even with two incomes, how many Amarillo jobs pay $60,000 a year?

This is the pickle that the next generation of homebuyers will face—meaning that many will continue as renters. Still, owning a home is the best investment yet. Suppose you bought the Los Angeles house back in the 1980 when the price was probably around $90,000, look at the wealth gained just from owning this ordinary house. Then there is the competition from “corporate investors” who are buying up real estate in places like San Francisco and other parts of California. What these folks are doing is using a lot of cash they are sitting on to buy houses as soon as they are listed—then they raise the asking price, flip them and make a nice chunk of money. Home prices are rising extremely fast in places where some of this “funny money” is driving the demand—as opposed to the average Joe buying a house.

So, planning to buy a house? Save, save, save. Keep your credit in good shape and maintain a good FICO credit score. Buy a small house, then move up, don’t buy too much house just starting out. Think of a house as a long-term investment. Think of buying a house as a savings account for the future—pay yourself or pay a landlord. Compare buying a home to renting a house for 10 years and see which situation gives you a better return on your money.

Copyright 2014 – L. Arthalia Cravin. All rights Reserved. No part of this commentary may be reproduced, stored in a retrieval system, or transmitted by any means, electronic, mechanical, photocopying, recording, or otherwise, without written permission from the author.

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