Affordability and the Rochester-area housing market
I am not a real estate broker or agent, but, like you, I hear and read all the time about how nationally, home sales are down significantly because of mortgage interest rates, ever-increasing home prices and low inventory.
That is why it was encouraging when the “New York Post” reported that, in August, Rochester was the hottest real estate market in the country. It explained, “This unassuming city next to the Great Lake of Ontario might not be on most peoples’ radar, but cashstrapped homebuyers have taken note of its modest median list price, which came in at $250,000 in August — far below the national median of $435,000.”
Notwithstanding that good news, the issue for me continues to be “affordability,” and it should be the same for anyone looking for a new home, whether a first-time buyer or any buyer.
The most common rule for housing payments, the cornerstone of affordability, states that you shouldn’t spend more than 28% of your gross income on your housing payments. This should include every element of your home loan (e.g., principal, interest, real estate taxes and insurance). That said, when I purchased my first house in 1974, the rule was between 25% and 28%, and we did everything that we could to be closer to 25%, including having as large a down payment as possible, in order to reduce the amount of the mortgage and monthly mortgage payment.
Also, the average 30-year mortgage interest rate at the end of 1974 was 10.03%. With that background, the average ratio in 2020, in some of our larger states, was: California (37%), Florida (33.2%) and New York (32.9%), when the average 30 year mortgage interest rate was 3.38%.
As I write this column, the average interest rate is 7.73%, more than double that in 2020, so I wonder what those ratios are today with the higher monthly mortgage payments. The bottom line is that, even with higher mortgage interest rates, higher home prices, general inflation in the economy and, for some, higher wages, that overall home payment ratio and making as large a down payment as possible are still critical to affordability.
When I speak with my friends in the real estate business, I ask them if they emphasize that ratio, and make their home-buying clients create an honest budget that they can stick to, and they all say, yes! As we have discussed in the past, I saw too many debtors living in 40% and more ratio homes because they could get them. If you are looking for a home, please do the math and look for a home that you can actually afford.
‘National Epidemic of Financial Illiteracy’
On another holiday season subject, I applaud the media, especially the newspapers that this column appears in, for concentrating more than ever on personal finance issues. On the other hand, it makes a statement about where our economy is and about what I still see as our continuing “National Epidemic of Financial Illiteracy.”
One of the subjects that we are seeing, hearing and reading about all the time is the over $1 trillion in credit card debt, a record, and how Americans should consider, especially during the holidays, using more cash and debit cards rather than credit cards. Even a representative from Experian, a credit reporting agency, recently suggested that in a television interview.
Of course, that is one of my basic lessons, but it is a difficult one for too many Americans in what I always refer to as our hyper-consumer society, where debt is OK if you can make the monthly payments. As I describe it, a cash-flow analysis of affordability vs. a balance sheet analysis like we had when I was growing up — and there were no credit cards. As I write this column sales were up for Black Friday, Small Business Saturday and Cyber Monday 2023, but I can’t help but wonder how much of those sales were made with credit card debt.
Budget for holiday purchases
That said, I hope that after the holidays Americans with credit card debt will get down to business, seriously budget and pay off any holiday credit card debt as soon as possible, as well as any non-holiday credit card debt. Then, I hope that they will come up with a plan to save for the 2024 holiday season.
Consider this. Starting in January, put a tenth of your projected holiday budget into a savings account, earn interest, and then take it out in November to fund your holidays.
Carefully plan for weddings and related expenses
On a different subject, as we are in the December holiday season, I have been hearing a lot of jeweler’ radio commercials. They are reporting that diamond prices are still low, because of a lack of demand during the pandemic, and they remind us that this is a popular time to get engaged.
Those commercials reminded me of some interesting wedding-related articles that I read last summer.
The first article was about how many couples were still spending so much on their weddings, with an average cost in 2022 of $30,000. For 2023, it was estimated that couples would spend, on average, $11,000 on a reception venue; $2,000 on a dress; $2,500 on a florist; $4,000 on a live band; $2,000 on a photographer; and $5,200 on an engagement ring.
I have not seen any estimates yet for 2024, but a wedding is clearly something that has to be budgeted and carefully planned for.
With inflation and the personal finance challenges of today, it will be interesting to see the choices that couples make.
The other article was about how some couples were having their college mascots as part of their wedding celebration at the cost of up to $300 per hour.
I hate to keep harping, but a recent report advised that 70% of not-for-profits are receiving less in donations than they did in 2022, and that was the lowest amount since 2010. Although apparently the wealthy, (those making over $200,000 a year), are increasing their donations – thank you – please, we all need to do more!
John Ninfo is a retired bankruptcy judge and the founder of the National CARE Financial Literacy Program.