Real Estate

Housing Unaffordability

Short post this morning. I just wanted to share this scary chart I ran across. We all know that housing affordability is at a 4-decade low, but this chart really brings it home.

The bars show what % of people are are able to get mortgages they can afford. Only 6% of home buyers (green bar on left) could do so within the traditional mortgage guideline of payments not >28% of your income. Just 6%.

Most people are in the middle of the chart, where mortgage payments would be in the 35-45-55% range of their income. That’s pretty high. Still, look at the right side of the chart. Over 20% of people are at 60-70-80% of income! How would they be able to afford anything else?! Scary.

I’m not sure exactly what this means for investors over the next 3-5-10 years, but I’m guessing it’s not going to be a seller’s market. Especially for bigger houses. The opportunity is probably in being a landlord … renting to people who can’t afford to buy at this time.

Are you a real estate investor? What’s your strategy in this market?

Image: Mortgage Resource Center

4 thoughts on “Housing Unaffordability”

  1. Excessive immigration has been the major driver of high real estate prices. From 2000 to 2024, between 31 and 36 million have entered the country. There has been a ramp up in population without a commensurate increase in the nation’s housing stock. The excess immigration has also suppressed wages. Add inflation with higher interest rates as a cherry on top, and that is how we got to having the affordability problem. Real estate is one of the industries that profits and backs unlimited immigration.

    Answering your question. Yes, I invest in real estate. I don’t invest directly to avoid management issues. I have neighbors who ‘retired’ on rental income and now spend their time managing property maintenance and dealing with tenant issues.

    I invest through Rest Estate Investment Trusts and own shares that are spread out across multiple industries including apartments, self-storage, data centers, and retail property. These are paying nice returns and I just get distributions showing up in my accounts. I have only encountered issues with two types over the past five years. One was a hospital REIT and it had a couple of its largest operators stop paying their rent. The other was a retail center operator that also had exposure to office buildings. They spun off their office buildings, which caused a momentary cut in their dividend. I was out before the spin and am now back into the stock because it is selling at a bargain price now.

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    1. Interesting …! I looked at moving some money into a REIT index fund when the real estate market went crazy with the pandemic lockdowns. It was the Vanguard VNQ fund.

      It was up a bit, but not that much. I think their holdings were heavy in commercial properties where workers were now staying home. That sunk their returns. I imagine a Hospital REIT would have suffered in a big way, too.

      Agree that immigration contributes to housing inflation. It’s just obvious supply & demand. Rents have gone up as quickly as anything these last few years.

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      1. I like buying individual REITS over a REIT index. I screen for REITS that have a good current yield, a long term record of increasing and not cutting their distributions, with good stability rating. I steer clear of REITS with exposure to a dying business.

        I know from first hand experience managing IT that offices can be virtualized. I virtualized the last company that I work for back in 2009. The company found that employees were actually more productive working virtual, because they were giving some of the time they were saving on commutes back to the company. It also allowed the company to hire throughout the world as it is hard staffing in high priced California. During the Covid-19 shutdowns, I worked consulting with other companies to allow them to work from home because they had to start doing it.

        REITS currently have special tax treatment because of Trump’s tax code. REIT income is treated as Qualified Business Income and receives a 20% reduction in recognizable taxed income. What a deal! Many of REITS were beat up because they were seen as alternatives to fixed income and they get hurt when interest rates go up. But you know what? You still collect nice sized distributions that are growing and the income streams become more valuable during times like these when interest rates are coming down.

        VNQ’s current yield is 3.87%. If you look at a chart of its dividend growth since 2005 it has hovered around $3 per share and has grown at a 2% rate over the past 10 years.

        CUBE which is self-storage REIT pays 4.1% and has grown 16% per year over the past ten years. MAA is an apartment REIT that has a 3.63% current yield and has grown 4% annually for 20 years and 9% over the past five years. O, also known as Realty Income currently pays 5.5% and has grown 5% over the past 20 years and 3% over the past five. RNP is a closed end REIT that currently yield s7.14% (they use leverage) and has grown 3% over the past 20 years and 2% over the past 5.

        REITS are not necessarily operating in an efficient market.

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      2. Great insights & analysis! I guess I need to learn a lot more about REITs and maybe find a place for them in our portfolio!

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