‘They won’t be able to keep up’
Orlando homebuyers’ high debt prompts warning about buying expensive houses
Orlando has some of the highest debt among homebuyers in the country, according to a new study, as experts warn that buying too much of a house can lead to financial disaster.
In a survey of major cities by Construction Coverage, metro Orlando ranked ninth among major cities with the highest share of home purchases with a debt-to-income ratio of 36% or above.
The debt-to-income ratio is calculated by dividing monthly debts by monthly income. In Orlando, 51.4% of home loans in 2020 had a ratio of 36% or higher, and 22% of mortgages went to homes with a ratio over 43%, according to the survey.
“The bigger that ratio is, the harder it is to make their payments,” said Geoffrey Turnbull, an economist and professor of real estate at UCF. “When big events occur, even sometimes little events occur, they won’t b e able to keep up.”
Ideally, mortgage payments should be no more than a 25% of a household’s take-home pay, according to Turnbull.
Other than Florida, most of the loans going to high ratio homes were in the western U.S. Miami, which ranked second at 58.5%, was the only other city east of the
Rocky Mountains to make the top 10. Riverside, California, took the top spot at 60.3%.
In the first year of the pandemic, American consumer debt grew by 6%, the highest jump since the Great Recession of 2008, according to Debt.org.
Turnbull said COVID hit particularly hard on Orlando’s tourism economy, which saw tens of thousands of service workers laid off or furloughed. “During the pandemic, many lower-income took a big financial hit and have taken on a lot of consumer debt as a result,” he said.
Orlando consistently ranks at the bottom of major metros for wages and income. In 2021, Orlando was last in a survey of the top 50 cities for median hourly wages at $17.59.
Kyle Fowler, a former Disney performer, said he saw many of his coworkers struggle with debt when they were let go from the park in March 2020. “You’ve got a major city that’s almost completely dependent on tourism,” he said. “Even with stimulus money, there’s only so much you can do.”
Wages, especially among the service industry, have been rising since the pandemic as businesses have worked to lure workers back, but Turnbull says high inflation has eaten those gains.
“A lot of people that we’re talking about are in fields where their pay is rising, but it’s not rising as fast as some of these other costs,” he said.
Inflation is up 7.9% over last year, according to data from the Consumer Price Index.
A month before the pandemic, Fowler and his wife had paid off $114,000 in household debt, which he says was a blessing. “We never felt the effects of COVID, and as performers, that was pretty rare,” he said.
Fowler became a financial coach to start helping his friends and founded Financial Flippers. He runs that on the side after becoming a loan officer at Better Mortgage and moving to Charlotte, N.C.
He says the blisteringly hot housing market that’s now pushing people into dangerous debt territory. Clients have been buying homes for the top amount their mortgage can be approved for, and sometimes more.
“People are maxing out completely what they can take,” he said. “They feel they have to in order to be competitive.”
Home prices in Orlando have skyrocketed in the past year, setting new record highs in seven of the past 12 months. Homeowners with debt might see a sharp increase in equity as a boon, but Turnbull says it’s not that simple.
He recommends against refinancing a mortgage to service household debt.
“That’s not a formula for longterm financial success,” he said.
And as for selling and pocketing the money, “Where are you going to live?” Turnbull asked. “You become a renter, and rents are skyrocketing.”
Fowler says struggling households should start making most of their purchases with cash so they can keep better track of their spending and not rack up more debt. “Using cash, you actually feel a pain point,” he said.
He also recommends homebuyers seek to buy homes at prices below their maximum approval.
Turnbull says people buying homes at the limit of what they can afford is precarious situation. “There’s always the fear that they won’t be able to service that debt,” he said.
He worries that the next year could see an increase in defaults and foreclosures, which jumped by 11% in February and are expected to continue to rise for the next six months, according to real estate analysts Attom Data Solutions.
“All it takes is some event,” Turnbull said. “The transmission goes on your car or you have to take a kid to the emergency room, and that’s it.”