Currently, people age 50 or older account for 63% of homeowners nationwide. Three quarters of them live in single-family homes and 76% own their own homes. Increases in both population and longevity mean that the percent of homeowners in their 70s, 80s, and 90s is increasing. Trends among those over 65 reveal some of the problems with these growing statistics.
A support structure unprepared for these rising numbers of seniors begets homeowners unprepared for retirement and housing costs, as they are unable to manage both healthcare costs and housing costs without a steady income. And more of them over 65 still have a mortgage after retirement, a statistic which nearly doubled from 1989 to 2016. A similar statistic holds for loan-to-value ratios, doubling to 51% for those age 50-64 and tripling to 39% for those 65 and over. The average home equity amount was $143,500. These values originate from what were at the time low interest rates and recently popularized home equity loans.
Social Security is going to be an important factor in enabling seniors to acquire safe, accessible, and affordable housing, since it is a main source of income for many of them. In 2016, 9.7 million of those over 65, nearly a third, were spending more than 30% of their income on housing costs, and 4.9 million were spending over half.
According to the California Association of Realtors (CAR), in the third quarter of 2018 just 27% households in California would be able to afford a median priced home at $588,530, requiring an annual income of at least $125,540. While this is up 1% from second quarter, it’s down 1% from the same time last year. The percent able to afford a home is even lower in some counties, such as Los Angeles County and Orange County, where it is 22% and 20% respectively. For Orange County, this is unchanged, but Los Angeles County was tied with California’s average in the second quarter. Most Southern California counties were relatively static. A few counties are taking the hit better than Los Angeles and Orange counties, such as Riverside and San Bernardino counties where affordability are at 37% and 48% respectively.
Sales numbers, though, declined throughout the state and especially in coastal areas. This is a direct result of increasing prices and interest rates. Fortunately, prices seem to be at a peak and can only stay still or go down from here. Unfortunately, interest rates are still going up, which would negate some of the effect of dropping prices.
Balconies provide the outdoor space and fresh air so desired in residences and offices alike. They can be deadly, though, if not properly built and maintained. Even if no one gets hurt, preventing safety hazards can cost less in the long run than repairing damages. California Governor Jerry Brown signed two bills in September aimed at inspection, repair, and accountability in multifamily dwellings.
One very common problem found in balconies is water intrusion. Even though it’s well known that water can lead to dry rot and structural damage, most balconies don’t have adequate drainage or ability to repel moisture. Balconies should be sloped, and redundant drainage allows for repairs when one drain is not working properly. Waterproofing can also help.
Inspections usually don’t miss much in the interior of the building, but outside areas can frequently be overlooked. The architecture consulting firm Marx|Okubo suggests a flood test of balconies before the occupants move in. After the residents or tenants move in, property owners in California may be required to inspect their balconies every three to six years, and probably should more frequently. Landlords and property management companies should also respond to tenant concerns as quickly as possible.
Real Estate Investment Trusts (REITs) in Washington, D.C. have taken a look at the market and decided this is the year to sell. There are billions of dollars in property assets owned by REITs in the region, and they have noted the high sale prices, and especially that they’re predicted to be going down soon. They want to sell at the top of the market. We’re headed towards a buyer’s market, and unless you want to hold on for another five years or so, the time to sell is now. And that’s true for any investor, not only this localized market.
AvalonBay Communities has sold a net of $895 million worth of property, despite buying $335 worth of property in the same period. Washington REIT is currently a net buyer by a small margin, but once they sell their entire retail portfolio for about $800 million, that will shift dramatically. Liberty Property Trust is also seeking to drop their office portfolio and focus on industrial property. Many hotel holdings companies, particularly in Bethesda, don’t want to be owning that type of property five years from now and are either selling or merging.
While fixed-rate mortgage (FRM) interest is currently on a downtrend, over the long term they have increased since last year. As of October 19, 2018, the current average 30- and 15-year FRM rates are 4.7% and 3.98% respectively. The September 2018 30-year FRM figure was 4.5%. Compare this to September 2017, when the average 30-year FRM was 3.7%, resulting in a September 2018 buyer purchasing power index (BPPI) of -9.16. This means the available mortgage funds of buyers decreased by 9.16% during that 1-year period. With the current rates, the mortgage payments on a $500,000 mortgage are 12% higher than last year, contrasted with only a 3% increase in average wages.
Interest rates are expected to go up through the next 30 years, furthering this trend. Fortunately, the BPPI is expected to flatline after 2020, when another recession is predicted. After that point, population growth will result in a support system for the economy and higher median income, opposing the rising sales prices and interest rates. The combined effect will be a stable BPPI, albeit at a lower point than the current available mortgage funds. Adjustable rate mortgages (ARMs) have gone up as well, which combined with the changes to tax laws means ARMs won’t be as favorable as they have been for high-income buyers.
Overall, we’re in a slowdown period. Prices won’t be skyrocketing anymore, and values will soon reflect a more natural appreciation over time as sellers will need to account for lower buyer purchasing power. Though buyers can’t do anything to speed this along, sellers won’t sell if buyers can’t afford their homes.
For charts and more in-depth information, see the following articles:
Mortgage rates drive buyer purchasing power
Current market rates
2018 saw a few important changes to the tax laws regarding deductions, both standard and itemized. The standard deduction has been nearly doubled, so more people are taking it. This results in lower taxes for people who regularly take the standard deduction anyway, but higher taxes for about half those who used to itemize. It also means fewer people can take the mortgage interest deduction (MID), since it requires itemizing.
As for itemized deductions, it has become more difficult to itemize certain deductions, especially in high-priced California. State and local taxes are now limited to $10,000, less than the average Californian pays. The MID ceiling was reduced from mortgages of up to $1 million to mortgages of up to $750,000. For home equity lines of credit, qualifying for the MID requires that they fund home improvements. Only military families still retain the moving expenses deduction.
These changes mainly affect areas with high incomes and high housing costs. While home prices have not actually decreased in California since the changes went into effect, their values are expected to be about 5.7% less than what would be projected without the tax changes, according to the Cleveland Federal Reserve Bank. This has slowed down the rising prices, and may magnify the effect of a recession in the near future. The Cleveland Federal Reserve Bank suggests the following average price differences as a result of the new tax laws:
- -8.4% in Bakersfield
- -7.0% in Fresno
- -8.4% in Los Angeles
- -8.6% in Oakland
- -8.6% in Riverside
- -8.5% in San Diego
- -5.9% in San Francisco
- -7.7% in San Jose
- -7.1% in Stockton; and
- -8.7% in Vallejo.