NerdWallet's Smart Money Podcast - Home Sweet (Expensive) Home: Navigating a Tough Housing Market

Episode Date: July 3, 2024

Understand why the current housing market is so challenging, how people can afford to buy a home, and what’s next for interest rates. How are people able to afford to buy a home in the current housing market? When will houses be affordable again? Hosts Anna Helhoski and Tess Vigeland (filling in for Sean) discuss the current state of the housing market with NerdWallet home and mortgages expert Holden Lewis, exploring factors such as high mortgage rates, slow home sales, and high prices. They explore the various factors that have made homebuying so difficult and what potential buyers can do to navigate this tough market. Then, they break down the latest money headlines, including student loan forgiveness being blocked in two states, the IRS running into customer service issues, and a new California law that will add financial literacy to high school curriculums. In their conversation, the Nerds discuss: the housing market, mortgage rates, homebuying tips, real estate trends, home insurance, first-time homebuyers, high mortgage rates, home affordability, real estate market, mortgage rates 2024, housing market forecast, home prices, real estate investment, housing market trends, property market, home insurance costs, homebuying guide, home sales, buying a home, home ownership, housing crisis, real estate tips, home insurance, mortgage trends, real estate news, home equity, mortgage rates today, real estate market forecast, housing market analysis, real estate market trends, home buying tips, and mortgage loan tips. To send the Nerds your money questions, call or text the Nerd hotline at 901-730-6373 or email [e-mail]. Like what you hear? Please leave us a review and tell a friend.

Welcome to NerdWallet's Smart Money Podcast. I'm Anna Helhosky. And I'm Tess Vigland. And this is our weekly money news roundup, where we break down the latest in the world of finance to help you be smarter with your money. We'll go deep into a single topic, then leave you with the latest money headlines. Sean is on vacation, so we asked our producer extraordinaire, Tess, to step in. She is a veteran of NPR's marketplace and we can all things considered. Plus, she's a delight to work with. Tess, welcome to this side of the show.

Oh, thank you so much, Anna. I am delighted to be in front of the microphone rather than behind it. Today, we're talking about the housing market. A combination of factors are dragging down home sales, and there are signs that new constructions are lagging as well. That's right. And we have NerdWallet's home and mortgages expert, Holden Lewis, here to walk us through what is happening with home buying right now. Holden, welcome back to Smart Money. It's a pleasure, Tess and Ana. So we're hoping that you can start off by giving us a big picture look at the housing market right

now to get listeners up to speed. What does it look like out there? All right. Well, get out your handkerchiefs to dry your tears. We're seeing a really intimidating combination of high mortgage rates, high home prices, and slow home sales. So let's look at if you bought the median price home in May at the average mortgage rate, your monthly payment was like $2,200 plus taxes and insurance. And that's after a 20% down payment. So $2,200 a month plus taxes and insurance, that means that houses are just really unaffordable for a lot of people, especially first timers. Beyond that, the average rate on a 30-year mortgage in June was just under 7%. And that is double what it was just before the pandemic.

Like in January 2020, it was 3.5%, now 7%. Sales of existing homes are down a lot compared to before the pandemic. You can say the same about sales of newly constructed homes. And yet, there aren't enough homes for sale to meet the demand. And so, you know, because affordability is so dismal, more and more sellers are cutting prices. So I guess that is one of the bright spots if you're someone who wants to buy a house. Now, Holden, the housing market got some bad news recently. Housing permits and construction starts are down. Can you tell us what that actually means?

When you look at the details, it's really not so terrible. Overall starts are down. Can you tell us what that actually means? When you look at the details, it's really not so terrible. Overall, permits are down compared to a year ago, but that's mostly because builders are wrapping up apartment construction. So permits for single-family houses are actually up compared to a year earlier. Builders started construction on fewer homes, but it's not a huge decline. And I think that builders are just waiting for mortgage rates to fall. And then they're going to start selling houses or building houses at a pretty good clip again. You know, Holden, you had a comparison there of kind of rates now versus rates before the pandemic. And you look at some other areas of the economy, jobs, the stock market, there has been

quite a rebound since kind of what we thought was about the end of the pandemic. But you look at housing and not so much. Can you talk us through why the housing market has been a little more sluggish to rebound compared with other areas of the economy? Probably the biggest factor is something that is called rate lock-in. And that's when people don't want to sell their homes because that would mean giving up a low mortgage rate and then taking a high one. When you look at mortgages today, three in five outstanding mortgages have an interest rate of 4% or lower. Well, now mortgage rates are around 7%. And so if you have a rock bottom rate and you sell your house and buy a similar one today, you might double the monthly mortgage payment. And I'm

not talking about upgrading to a more expensive house. I'm just talking about relocating to a house that's similar to the one you just sold and doubling your monthly payment. So that potential payment shock is discouraging people from selling their homes. So they're staying put, even if they would prefer to relocate. We know that home buying season is in full swing right now. So even though home prices and mortgage rates are high, people are still buying homes. Holden, do you have a feel for how the 2024 home buying season compares to a few years ago, maybe 2021?

It's a really difficult market for homebuyers now. For every three homes that were sold in 2021, two homes are being sold this year. And there are three main reasons for that steep decline in sales. Mortgage rates are high. So of course, that drives the monthly payments higher. There are fewer homes to choose from because of rate lock-in. And then with inventory so low, there aren't enough homes for sale to meet demand. And that's why prices have been going up, even as fewer people are buying houses. I think that's kind of a head scratch for some people. They say, well, if fewer homes are being sold, then why are prices going up?

And it's just simply because people aren't selling their houses. So there just aren't enough houses for sale to meet that demand. Holden, we've also heard a lot about the high cost of home insurance these days. Presumably that might be contributing to the squeeze that homebuyers are feeling as well? It sure does. Home insurance premiums are sky high in several states, including two of the four most populous states, Texas and Florida. In some states, it's hard to even find a company that will issue a policy. In California, the problem is wildfire. In Florida, it's hurricanes. In Texas, it's hail, wildfires, and hurricanes. And you're finding these problems in places like Louisiana, Arkansas, Mississippi, Colorado, Kansas, and Nebraska. They all have high home insurance

costs because of wildfire, hail, and tornadoes. And this means that when you buy a home, you have to factor home insurance into your decision because a house might be affordable when you add up the principal interest and the property taxes, and then you add home insurance and that can push the monthly payments beyond affordability. I mean, this really hits me personally

because I live in a beach town in South Florida and I inherited a house in North Texas. And the home insurance costs are about $6,000 a year for each house. I mean, you know, depending upon where you live, that price is either outrageous or, like if you're in Oklahoma, very sadly familiar. And is that presumably much higher than what you've paid in previous years? It's definitely a big increase. I think that maybe 10 years ago, my home insurance here in Florida was less than half of what it costs now.

So Holden, if people aren't buying, that means that they're most likely renting, right? I'd seen a study recently out of Harvard that found that just 6% of renters can buy a home today. And they found that in order to afford one of those homes, they need to earn at least $120,000 to cover a $3,100 payment on a medium-priced home. And they'd have to cover buying costs, and they simply can't do it. Right. This is a problem that we're definitely facing. You know, if you're a first-time buyer, there's something called the bank of mom and dad. And that's when people buy a home

because their family gave them money for the down payment. And it's a surprisingly common thing to happen. It sure didn't happen to me. Yeah, me either. We love an account. I have some friends who I've never asked them, but I suspect that they got some help from mom and dad. There was a 2020 study that found that among people aged 25 to 44, monetary gifts from family boosted the home ownership rate a lot by 15 percentage points. And this seems to mean that you're more likely to own a home if you have

wealthy parents. And that also contributes to the black-white homeownership gap, which just remains really wide. And it has actually not narrowed since 1968 when the Fair Housing Act was passed. Well, Holden, so if homes are unaffordable, new ones aren't being built, what does that mean for the most traditional form of wealth building in America, which is homeownership? It means that a gap might be growing even more between homeowners and renters. Homeowners have gained tons of equity in the last few years. The medium home price is almost up 50% in just four years. Meanwhile, renters have been locked out of those gains and their monthly rent payments have been going up. Eventually, those renters might inherit their parents' housing wealth.

So, okay, they can build wealth that way through inheritance, but at the same time, homeowners are gonna inherit their parents' housing wealth too. So that gap could remain. Are there any signs of relief in the data? Is the housing cost burden just too high right now? I try my best to encourage people to help them solve their problems. I wanna strike an upbeat tone whenever possible

while also being honest. And I can't sound upbeat when I'm talking to people who have never owned a home but they want to buy one. It's extraordinarily difficult right now. That said, I will offer a couple of nuggets of hope. First of all, the first baby boomers also faced a horrible housing market. In the early 1980s, when the first boomers were entering their prime home buying years, mortgage rates were above 10% and they even hit 18%. That problem was solved by the Fed kicking off a severe recession that caused a lot of those boomers to lose their jobs.

It was actually, believe it or not, it was tough to be a baby boomer in the early 80s. So, you know, as every millennial and Gen Z-er likes to point out, the boomers are doing fine now. And I hope that over the next few decades, today's younger people end up doing well too. Now, here's something more concrete to hope for. Some forecasters expect mortgage rates to fall to about 6.5% or lower by this time next year. And I think that when mortgage rates fall from like 7% to 6.5%, that's actually going to stimulate home sales. Some people are going to just say, forget mortgage rate lock, I want to sell my house. I mean, I've seen commentary that says that we won't see that erosion of rate lock-in until rates fall to 5%, and that's going to take years to get there. But I don't think so. I think a lot of people are sick and tired of the house they live in.

It's too small. It's too big. It's in the wrong place. And so they're going to use any excuse to sell and move on. And I think that when rates hit six and a half percent, we're going to see some of those people do that. All right. So there's a little bit of hope there. If you are someone who wants to buy a home, despite all of the challenges that we've laid out today, what's your best advice, Holden? First, save for the biggest down payment you can. And hey, withdraw from the bank of mom and dad if you can. Shop for a home patiently. There are not a whole lot of homes out there for sale, so it might take a while to find the one. And then when you do, apply with at least three lenders to find the best mortgage offer.

There have been studies done that show you will end up with a better deal if you shop around and get home insurance quotes early in the process just to make sure that the home is truly affordable. All right. Solid advice there. Holden Lewis, thank you so much. Thank you. Up next, a few money headlines from the last few days. All right, Ana, I'll give you three tries to guess the big headline for us today. Student loans. Yeah, I figured you wouldn't need three tries. So last week, judges in two states, Kansas and Missouri, issued temporary injunctions against the Biden administration's SAVE plan. That's Saving on a Valuable Education, S-A-V-E, SAVE. So this is the plan that the administration created about a year ago in an effort to fix

issues with other income-driven student loan repayment programs. The SAVE program was challenged in several Republican-led states, and these two court decisions basically agreed with parts of those legal challenges. And that just court decisions basically agreed with parts of those legal challenges. And that just threw things into limbo for some 8 million student loan borrowers who had already enrolled in the plan, a plan that would potentially cut some payments in half and make some borrowers eligible for loan forgiveness after just 10 years of repayments. So here's the latest twist. This week, the 10th Circuit Court of Appeals issued a stay in one of those rulings, the one in Kansas, after request from the Department of Education.

That means that the lowered payments can go forward for now while the case makes its way through the appeals process. But the loan forgiveness part of the SAVE plan is still blocked by the Missouri ruling. Seems like to keep track of all this, you need another degree for which you would need more student loans. Yeah, at this point you might feel like you need to consult an attorney or I don't know, maybe tarot cards. We've reached mid-year and Tess, you know what that means. Hot dogs and fireworks? That too, but it's also the time when our national taxpayer advocate, the person tasked with representing all of us in our efforts to comply with the IRS, reports to Congress on how well the agency is serving us.

And the report card is not all A's. No, it certainly is not. In fact, there are some significant problems. The advocate, Aaron Collins, says there are issues with delayed refunds to identity theft victims, delays in processing certain tax credit claims, and her report says the IRS is using the wrong measurement to track how many taxpayers get through its helplines. She says the current measurement leaves the impression that IRS employees answered 88% of taxpayer calls. That's pretty good. When in fact,

they answered 31%. That's not even in the same ballpark. It is not. Collins did give the agency points for a generally smooth tax filing season and praised it for returning to pre-pandemic levels of customer service. The IRS, meanwhile, responded that it, quote, recognizes it needs to make further improvements. It's also hired some 7,000 additional people to answer those phones as part of funding allocated by the 2022 Inflation Reduction Act. And finally, Ana, a follow-up to an item we mentioned a few weeks ago. There was a movement in California that was looking to put personal finance on the ballot this year with a requirement that it be taught in high schools. But that is no longer necessary.

Yeah, because it's going to become law via the state legislature instead. Governor Gavin Newsom announced a bill that leaders of both the state assembly and Senate agreed to. It will require high schoolers to complete a one semester class in financial literacy. And that's everything from balancing a checkbook to avoiding financial scams. Basically, everything we cover week in and week out on the show. So please put us out of business, at least for the next generation. I'm kidding, of course, but not really. Yeah, this will start with the class of 2031.

They'll have to pass this course in order to graduate. And this is a standalone curriculum. It can't be part of another econ course or anything else. Just personal finance. You might call it smart money. And that's all for this week's money news. We always welcome your money questions and comments. Turn to the nerds and call or text us with your questions at 901-730-6373. That's 901-730-NERD. Or send us a voice memo at podcast at nerdwallet.com. And remember, you can follow the show on your favorite podcast app, including Spotify, Apple Podcasts,

and iHeart Radio to automatically download new episodes. Today's episode was produced by Tess and edited by Rick Vanderknecht. Sarah Brink mixed our audio. And here's our brief disclaimer. We are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances. And with that said, until next time, turn to the nerds.