The average person thinks that when they pay off the mortgage, they live in their home for free. This is semi correct. Sell the house and put the money in the bank and in the past, the interest was what you would pay to rent the house. So with a half million-dollar home today, the money in the bank pays about .05 percent. That comes out to $2500 a year or $250 a month. Something is wrong here. If you buy the same property as an investment, you will probably get a rental investment return of $2,500 a month which is $30,000. That’s a 6% return on your investment. So being a paid off home owner gives you a better return on your savings than what the bank could offer by a mile.
The statement hidden behind the data is that if interest rates remain low, the average blue collar worker can ill afford the house payments for a very overpriced home. If bank interest rates were to reach 8%, the monthly payment would be $3,660 a month, whereas at 5% they would be $2680 a month. The neat thing about the high sales price, is that it locks in the property tax assessment which is 1% in California. Even at the lower amount, the buyer with no money down needs about 50K a year just for the house payment, taxes and utilities
What is missed here, is that retirement funds or people with cash, can buy a home with an expected rental return of 6%. This in turn puts stress on the starter home prices. They go up in price to a level to where, starter homes are no longer starters.
There is a conundrum here; low bank interest rates, high rental return rates, and unrealistic house valuations. The real loser here is the homebuyer with very little down. He will be broke the rest of his life paying off the home. If you think about it for a few minutes, you will realize that everyone rents the home they live in. Your lifespan determines the rental length. A man in Oxnard made millions leasing 100 acres of land from the city for 100 years. He built rental condominiums on the acreage. After 20 years, he had them paid off and I think he lived to realize another 40 years of income off of them. So after another 40 years, when the lease expires, the relatives will give the land back to the city of Oxnard.
So until the cost of money gets back to more realistic levels. Everyone will be forced to park their savings in real estate investments, not home ownership, there is a difference. This is the definition of a bubble, the miss allocation of resources. The investment return, not the value of the asset, justifies the price paid.
The real reality of the situation is that when the housing prices double, you pretty much double the number of people occupying the house. And it is only noticeable when you come home late and can’t find a parking space for your car. Go figure.