April 16, 2024 – Just How Valuable is Real Estate?

Economic Commentary

Those that have owned homes for a long-time understand what the numbers tell us about homeowners. According to the Federal Reserve, homeowners have a much higher net worth than renters do — the median net worth for a homeowner in 2022 was $396,200, versus just $10,400 for renters. As strong as these numbers are—homeownership delivers more value than these impressive investment numbers.

For example, a home represents protection from inflation. Once you have a fixed-rate mortgage, the majority of the payment will not rise with inflation – the exception being taxes and insurance. Rent is 100% subject to inflation. Homeownership has intrinsic value as well—it represents freedom from landlords and the ability to settle down with the freedom to own pets and paint the walls whatever color you would like. Together, this is why owning is often referred to as the American Dream or the pride of homeownership.

This is also why, despite higher prices and interest rates, there is no shortage of demand from those who would like to purchase. Affordability is an issue for many, but the biggest issue today is finding a home to purchase because many with very low interest rates or no mortgage at all, don’t want to leave their homes. Eventually, homes will become available, but the National Association of Realtors has pointed out that there is a shortage of over five million homes in America. And when there is a shortage of something, that commodity tends to hold its value. Hence, real estate continues to hold significant monetary and intrinsic value.

Weekly Interest Rate Overview

The Markets. Mortgage rates rose again in the past week as the markets reacted to the strong jobs report. The numbers did not fully take into account the market’s more recent over-reaction to the slightly disappointing consumer inflation report. 30-year fixed rates rose to 6.88% from 6.82% the week before. In addition, 15-year loans increased one tick to 6.16%. A year ago, 30-year fixed rates averaged 6.27%, 0.61% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “Mortgage rates have been drifting higher for most of the year due to sustained inflation and the reevaluation of the Federal Reserve’s monetary policy path. While newly released inflation data from March continues to show a trend of very little movement, the financial market’s reaction paints a far different economic picture. Since inflation decelerated from 9% to 3% between June 2022 and June 2023, the annual growth rate of inflation has remained effectively flat, ranging from 3.1% to 3.7% and averaging 3.3%.  Note: Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.

Real Estate News

More than one-third (36%) of Gen Zers and millennials planning to purchase a home soon expect to get a cash gift from family to help fund their down payment, according to a new survey from Redfin. Young homebuyers are also getting financial assistance from family members in different ways. Approximately one in every six (16%) Gen Zers and millennials say they will utilize an inheritance to help fund their down payment, while roughly 13% intend to live with their parents or other family members to save money for down payments. Working to earn money is the most frequent strategy for young buyers to fund down payments, as some 60% say they’ll save directly from their salaries, while 39% plan to work a second job. “Nepo-homebuyers have a growing advantage over first-generation homebuyers. Because housing costs have soared so much, many young adults with family money get help from Mom and Dad even when they have jobs and earn a perfectly respectable income,” said Redfin Chief Economist Daryl Fairweather. “The bigger problem is that young Americans who don’t have family money are often shut out of homeownership. Many of them earn a perfectly good income, too, but they aren’t able to afford a home because they’re at a generational disadvantage; they don’t have a pot of family money to dip into. This contributes to wealth inequality and often prevents young people from gaining economic ground on their peers who come from more privileged backgrounds.” Source: Mortgage Point

American basements are a hodgepodge of personal property, leveraged as storage units, man caves, game rooms, wine cellars, home bars and secondary living rooms. The problem is: If your basement floods, your flood insurance policy likely won’t cover damage to most — if any — of your belongings. It may be a consequential exception for policyholders as storms (and resulting flood damage) are expected to grow more intense due to climate change, experts said. “You can put anything you want in your basement, but don’t expect it to be insured for floods,” said Peter Kochenburger, an insurance expert and visiting law professor at Southern University Law Center. Flooding is the “most common and costly natural disaster in the United States,” according to the Insurance Information Institute. To that point, 99% of U.S. counties have experienced a flood since 1998 — and more than 40% of flood insurance claims are from outside high-risk flood areas, according to FEMA. Flooding causes 90% of annual disaster damage in the U.S., according to the Federal Emergency Management Agency. Just an inch of water can cause roughly $25,000 of damage to a property, the agency said. But homeowners and renters insurance policies don’t cover flood damage. Consumers need separate insurance to cover physical damage caused by a flood, defined as water entering a home from the ground up. That may occur due to a storm surge, heavy rainfall or an overflowed body of water like a lake or river. Homeowners insurance may cover water damage in some instances — burst pipes, sump pump backup, even water entering from the ceiling due to a collapsed roof — though insurers may require consumers buy additional coverage beyond a policy’s basic terms, experts said. Most people who have flood insurance get it through the federal government, via FEMA’s National Flood Insurance Program, experts said. Source: CNBC

While many U.S. homeowners refuse to sell their homes in fear of losing their low mortgage rates, nationwide return-to-work policies are motivating one in every 10 home sellers to relocate, according to a new Redfin survey. Remote work fueled a homebuying boom during the pandemic, but returning to the office wasn’t the most common reason survey respondents cited for moving, despite the fact that back-to-office mandates are an emerging cause of relocation. The results of Redfin’s survey showed that movers are considering additional factors including climate change and social issues when deciding where to live. The desire for more space is the most common factor driving people to relocate, with one-third (33.8%) of respondents citing it as a reason for their move. Next came the desire to be closer to family (22.6%), followed by the desire for a lower cost of living (21.6%). Nearly one in five (19.3%) respondents with plans to sell their home in the next year said they want to relocate to live in a place better aligned with their views on social issues. A similar share cited lower taxes (19%) and concerns about safety/crime (17.9%). Also notable: one in 10 (10.6%) respondents said they’re planning to move because they’ve dealt with discrimination in their neighborhood. A similar share (8.4%) listed concerns about the impact of climate change on their neighborhood as a reason for relocation. “Real estate is all about priorities and compromise,” said Redfin Chief Economist Daryl Fairweather. “While a lot of homeowners are staying put, refusing to give up their rock-bottom mortgage rates, some are opting to trade their low rate for a safer neighborhood, lower taxes and/or neighbors with the same political views.” Source: DSNews