Josh Lewis, BuyWise Mortgage, and Dustin Steeve, CEO, Lighthouse Escrow discuss how to become a homebuyer on this third part of seven about the basics of what you need to understand to become a homeowner.
“Everyone should be a homeowner at some point in their lives, and the sooner they arrive at that point, the greater wealth they will accumulate over their lives” – Josh Lewis
In this video, Josh answers:
- Is a market correction coming? Why or why not? Hint-demographic, policies of the government, and the quality of the current homeowners make a crash unlikely.
- The trends affecting the market right now that is hurting or helping home buyers right now.
- Discussion of how first time home buyers can get into a market with prices so high.
- The market trends of how Baby Boomer actions are affecting the current supply of homes
– What period of time do you think, if at all, we’re likely to see a coming short sale wave or some sort of big market correction that results from unemployment has been so high, people entering forbearance and all the rest?
– I don’t think we will. If you look-
– In California or nationally?
– Nationally. Nationally. So we’ve got a couple of things here. The government has intervened and pushed rates much lower.
So a lot of people can afford homes. When you look at the number of people that have lost jobs, it disproportionately impacts renters and those of the lower income levels.
At the same time, we have a large volume of people who have not been impacted or actually done better during the pandemic. And we also have, everyone remembers, you know, for me, my entire life, you hear about the baby boomers.
They were the biggest generation ever, and markets catered to them, did everything they wanted. Well, the millennials actually outnumber baby boomers now, and they are entering prime home-buying age.
So, the millennial generation is from like 26 to 32, 33, 34. 33 is your prime first time home buyer age. So, when you have this big demographic coming into prime home-buying age that has not been all that negatively impacted, you have a large amount of demand coming into the market.
And then when you talk about supply, Black Knight put out a number earlier this week. I believe the number was there were 400,000 less homes on the market this time this year as there were a year ago.
So we have less homes available. All along the west coast we have homes burning up and disappearing off of the market and you laugh. But you know if it’s 1,000, 2,000, 3,000 homes that burn up it’s a significant amount of supply.
So we have a supply demand imbalance that is not likely to change in the near term future. And I don’t think interest rates are gonna go up. And most importantly, everyone wants to look back to the last downturn and think that that’s ever going to be repeated.
That will never ever in a million billion years happen again. It was the perfect storm of bad underwriting, speculation, bad policy, all sorts of things that came together to cause that.
So for the last 10 years, we have homeowners with higher credit scores than we’ve ever had, with real down payments, and sitting on a bunch of equity unless they bought a year and a half ago or within the last year.
And even those, if you put 5% down a year ago you’ve got 5% more equity.
Something goes sideways, you can sell. A short sale or foreclosure does not result from someone not being able to make their payment. It results from someone not being able to make their payment and not having the equity to be able to do a sale. So we just don’t have that recipe.
But when you look at demographics, when you look at the policies of the government, and when you look at the quality of the current home buyer, homeowner, it’s just not likely to happen.
– Yeah, now I want to push on this a little bit because to your point, millennials are the largest home, the largest generation of home buyers but millennials are also not buying homes as early or at the same rates as their parents, right? That’s the data I’ve seen.
– If you go back a generation 27, 28 was the median age of a first time home buyer. So, it has pushed back to about 33. They’re doing it later, but they’re doing it at the same levels that previous generations have. There was a theory 10 years ago that they all have too much student loan.
They play Nintendo or PlayStation and sit in their parents’ basement and don’t want to go out into the real world. And I’m sure there are some that fall into those categories, but the vast majority of our buyers are millennials, and they have the same goals and objectives and dreams that everyone has had for the last 25 years that I’ve been doing loans.
– Well, so that’s the thing, right? Because, so I’m a millennial, and you know, I’m at the front end of the millennial generation. I’m 36. So, I’m at the very front end of it. My peers and those younger than me in my generation want to buy.
But the problem is that entry-level condo in Orange County in a good area is gonna be five, $600,000. And your, you know, the kind of home your parents probably raised you in in Orange County is going to be 800 to a million, right? That’s a lot of money.
Josh, where are these millennials that you’re talking to, where are they getting, like, you know, how are they doing this? And, you know, you’ve got a lot of older generations that are kind of camping out in their home because they don’t want to lose their tax basis and all the rest.
So, I mean, what’s gonna happen when there just isn’t supply turnover, like there isn’t right now? There’s no supply. And these people want to buy, but you know, they can’t afford the prices.
I mean, the market surely has to correct even a little bit as the older generations exit and the new generations come in, right?
Or do you think what, we just accept that people have to wait a little bit longer to buy?
– Well, you have supply constraints but largely there was this expectation that people would downsize as they age. We haven’t seen that.
Most baby boomers are aging in place. You know, they’ll retrofit and modify their home and stay there. Especially in California. In California, we have proposition 13. If you bought it in 1980 and your taxes are $200 a month.
And you know, so there are some exceptions to that in California, but largely we’re seeing them age in place. And then if you pass away and you have a child that inherits the property they get to keep that same tax rate. So, I don’t see a large supply coming onto the market.
And what happens is there’s an expectation that anyone should be able to live anywhere. Like, I don’t have an expectation that I get to live down in Newport Coast and in $5 million properties ’cause that’s not where my income and asset level is at.
So, if you didn’t go to college, and you make $3,000 a month, and you get married to someone that didn’t go to college, and they make $3,000 a month, it doesn’t make you a bad person. What it says is at $6,000 a month you’re probably not going to buy a single family residence in Orange County.
You might be able to get into a condo, but there are lots of parts of the country where $6,000 will get you a nice home.
One of the benefits and upsides we’ve seen with the pandemic is that more people can work remotely, not having to be tied to areas because to a degree the argument is, “Hey, the good-paying jobs are here “in Orange County, in LA and San Francisco. “You get further away from there, “you don’t have the good-paying jobs. “So great. “You can afford a home, but the jobs aren’t as great.”
The reality is everyone doesn’t get to live everywhere. You can always buy a home, but you don’t get to just say, “Well, I grew up in Huntington Beach. “I should be able to buy a home in Huntington Beach.” You know, if you go out and have a job that presents that income, then you absolutely can.
It really is the law of gravity. People don’t like it. We don’t have to like it. The laws of economics are economic laws. They’re supply and demand.
There are only so many homes that can be built somewhere. So, short of doubling the number of homes which means building a bunch of ADUs and infill stuff in any community, which then destroys the community and overburdens and taxes their services.
Now you go, “Well, I don’t want to live there anymore. “It wasn’t the nice place “that had million-dollar homes that I wanted to live in.” So, unfortunately, there are actual natural economic laws at play here.
So, it is a difficult choice. And that we are seeing a lot of millennials saying, “Hey, I’m going to go to Texas “where I can get a home for $350,000. “I’m gonna go to Arizona “where I can get a home for $300,000. “I’m gonna go to Nevada “where I can buy a home for 250, $300,000.”
I mean, nationwide, the average home price is up into the 300s now. And there’s a reason for that because you can’t equate it. I bought my home 17 years ago for $580,000. You can’t go, “Oh, it’s ridiculous the home isn’t $580,000.” Of course not.
Even though we’ve had low inflation at 2%, it should have gone up 40% over that time. Sorry about that. Trying to get this thing quiet. It should have gone up 40% over that time. So, it’s gone up more than that.
So, it’s gotten more expensive due to supply and demand issues, but the price of it has gone up, the monthly payment relative to it is probably about the same, the income required to qualify, and that’s what people need to be looking at.
The income to qualify in most of these areas is still pretty reasonable. We had a conversation in here in the office.
I remember in 1995, when I started doing this if I was qualifying someone and their household income was over $100,000, it would be like, “Wow, these people are doing well. “They make six figures in their household.” Now for us, we do loans throughout the state, but for our Orange and LA County and San Diego borrowers, if you’re not in six figures, you’re probably not buying a house.
You might buy a condo or you could be in Sacramento or some of these other areas, but for the most part, wages are up. I know it hasn’t been evenly distributed but there is a sufficient supply of borrowers that can qualify for properties to keep these values higher longer than people would like.
– Yeah, and I think that’s, so what is the sort of minimum income needed to qualify for a home in Orange County and San Diego County?
– So, on a conventional loan for the best-qualified borrower you can go up to a 50% debt to income ratio. On FHA the housing to income can only go to 47%. So, say if we’re looking at the numbers I ran, really well qualified borrowers earlier looking at an $800,000 property.
That payment was just over $4,000. So, at a $4,200, they need to make about nine or $10,000 household to qualify for that. And that’s at a very, very high debt to income ratio. In a perfect world they’d be making more like 12 to 15 to qualify for that.
– Let’s talk about what debt to income ratio is really quickly because I think people need to understand this. It’s really important in determining affordability whether or not you’re gonna get a loan to be able to purchase a home. What is debt to income ratio and what factors into it?
– So, in you know, 20 years ago, 25 years ago, when I started doing this we had two ratios, your housing to income ratio and your total debt to income ratio. So, your housing to income ratio is everything included in your monthly payment, principal, interest taxes, insurance, flood insurance if you have it, a homeowners association, if you have it.
All of those things added up. It’s just a simple ratio. We take that and divide it by total household income. And for the most part it needs, gross. Absolutely. So for the most part, your housing payment needs to be 45 to 50% or less of your household income.
In a perfect world I’d like that to be more in the 30 to 35% range just with the reality of what we’ve been talking about. Southern California home prices. I mean in a perfect world I’d like people to have 25% of their income going to housing, but reality 30 to 35 is easily done.
We do loans every month and in that 40 to 45 to 50 range that people make it work and don’t lose their homes. So, the second piece you have is the total debt to income ratio, and largely Fannie Mae and Freddie Mac just use the total debt to income ratio now.
The housing to income can come into it. And that’s where we’re talking about 45 to 50% total debt to income ratio. FHA will let you go to 57 and VA will let you go incredibly high based off of another calculation for residual income.
– What is included in total debt to income? So, are they looking at student loans, car payments? What are they looking at?
– Anything that shows up on your credit report. Student loans, credit cards, installment loans, auto loans, anything of that sort. So, like things like your cable bill, your cell phone, they don’t show up on your credit report, they don’t get included in that figure.
– So, I mean in one way, you know, if you’re trying to figure out how can I afford a house, and you don’t know anything about debt to income ratio and you’re also at a point in your life where you’re like do I want to spend $650 a month on this BMW so that I have a status symbol or do I want to have a $250 a month, you know, Hyundai? That might matter.
Like, especially if you know you’re doing it twice ’cause there’s two of you driving or something like that. That kind of stuff, actually that matters. ‘Cause it’s a monthly calculation, correct?
– Absolutely. We have a client that came in last week. Their application package came in, everything looks good. They were somewhere in central California. And they were looking to buy at 275, 300,000 and we’re like, okay, this looks good.
We pull the credit. And there’s a $1,000 car payment for someone that made $4,000 a month. I don’t know how to tell anyone, but there’s no one in the world making $4,000 a month that needs a car that costs $1,000 a month.
– Yeah, and that’s probably a truck or something like that, you know? ‘Cause those things are so expensive.
– So I mean that’s, yeah. That’s all stuff to take into consideration. That credit card that you have that has a high balance that, you know, you’re paying the minimum payment on every single month but you’re not anywhere near paying that off. That comes up, right?
– And oftentimes we see people that are like, oh, it just blows my mind that they make good money but you see, they just live beyond their means. I saw something I had never seen before the other day. A person with an $18,000 balance on a Nordstrom card. And I’m like, I like Nordstrom as much as the next person. I don’t know how you run up an $18,000 balance on a credit card with them.
– Shoes and handbags. It was the only thing I could think. I said, “She must have a wonderful closet of shoes and handbags.”