The Journal. - Think It’s Expensive to Buy a Home? Try Owning One.

Episode Date: April 18, 2024

It’s not just the cost of buying a home that’s going up. It’s also the hidden costs — like taxes, maintenance and insurance — that are going through the roof. WSJ’s Nicole Friedman explains why these prices are rising so fast, and what it means for the housing market. Further Listening: -'It's on Fire': Why the Housing Market Is Booming  Further Reading: -The Hidden Costs of Homeownership Are Skyrocketing  -Home Buyers Are Ready to Buy. But Sellers Aren’t Selling.  Learn more about your ad choices. Visit megaphone.fm/adchoices

Hello, this is Cameron. Hey, Cameron, it's Ryan Knutson from The Wall Street Journal. Hey, Ryan, how are you? You have to forgive me. I've got a bit of laryngitis at the moment. Well, that seems to be going on down here too. So I forgive you. Thanks.

It's not great when you host a podcast for a living, but... Yeah. Yesterday, I spoke to Cameron Ford. He's 35 years old and he lives in Anderson, South Carolina with his wife and three young kids. I wanted to talk to him about being a homeowner. I wanted to talk to him about being a homeowner. Our home is really kind of our dream home. It's got a nice big yard and it's pretty close to our work and it's fit us perfectly for what we were looking for. Did you feel like you'd like made it?

Like you'd sort of like achieve the American dream? I would definitely say that we were happy with what we got and we ended up with. It felt good. When it comes to the housing market, Cameron is one of the lucky ones. In 2021, when he bought the house, he was able to get a really low interest rate on his mortgage, less than 3%. Today, interest rates are hovering around 7%. Today, interest rates are hovering around 7%. I also bought a condo in early 2022,

just before interest rates started going up. The feeling that I had was like running, like you're trying to run to get into the house and the garage door is closing and you just like slide underneath it right as the door closes behind you. Like that's how I feel as somebody who bought a place a couple years ago. Yeah. And then you grab your Indiana Jones hat at the last second. Yeah, exactly. Exactly. Grab the hat, put it on. I'm like, whew. Yes. Recently, people like Cameron and me have

been in for an unwelcome surprise. All those other costs that go along with homeownership, like taxes, insurance, maintenance, are skyrocketing, which is making homeownership more expensive than ever. Meaning that if buying a home in 2021 was like sliding Indiana Jones-style into a closing door, owning a home in 2024 can be like entering the Temple of Doom and being chased by a massive boulder. I think that's the perfect way to describe it, because you're not really prepared for

an environment like this, where that's increasing so rapidly. Welcome to The Journal, our show about money, business, and power. I'm Ryan Knudson. It's Thursday, April 18th. Coming up on the show, why the hidden costs of homeownership are going up so rapidly. We'll see you next time. Plus, find amazing hidden gems in cities full of adventures, delicious food, and diverse cultures. You'll love it so much you'll want to extend your stay beyond the matches. Get the ball rolling on your soccer getaway. Head to visittheusa.com. What is it like covering the housing market in 2024?

I think this is a confusing year for the housing market. That's our colleague Nicole Friedman. 2023 was a really slow year. Home sales fell to the lowest level in decades. And so 2024, coming into it, was like, okay, is this going to be a recovery year or is this going to be another bad year for the housing market? Everybody knows that buying a house is expensive these days, but right now it's not just the list price. All the costs of buying and owning a home are going up. And the increasing costs start at the very moment you make a purchase, with expense number one, the down payment.

So to buy a home, the biggest upfront cost is the down payment. Often it's 5 or 10 or 20% of the cost of the home. And so in some parts of the country, that can be a huge amount of money, tens of thousands or even hundreds of thousands of dollars that have to be saved up front. So down payments have gone up because the cost of a home has gone up. And so if you're aspiring to save 5% of a $500,000 home, but then in your market, suddenly the typical price of that type of home that you want to buy has gone up to $550,000, then the amount you need to save for that 5% down payment has gone up. The second expense, the mortgage. So the next thing is qualifying for the mortgage. And so that's based on really kind of ability to pay what the lender thinks you can afford on a monthly basis. And so the higher the interest rate is, the higher that monthly payment is going to be for the same priced home.

What's the interest rate right now on a typical mortgage? So the typical interest rate is 7%, which is still down from last fall when rates were almost at 8%. So it is slightly easier right now for buyers than it was a couple of months ago, but that is still more than double the rates that we saw just a couple of years ago. Once you've mustered the down payment and agreed to what could be an eye-watering mortgage payment, congratulations, you own a home. Now you start to run into the expenses that can be a little more difficult to plan for, and the ones that Nicole says are rising surprisingly fast, like expense number three, maintenance costs. So as a homeowner, you have to cover all of the

maintenance and repairs. You don't have a landlord. If anything breaks in that house, in that home, that's your responsibility. You could own that house for one day and then the boiler breaks or there's a hailstorm. And so there's just an assumption that homeowners should have and should budget for of kind of ongoing repairs that they need to make. The thing is, in the past couple of years, the cost of that routine maintenance has gone up. The cost of just labor and materials has gone up. So there's a website, Thumbtack, that helps connect people with these service professionals, helps them get quotes. And so Thumbtack has an index of kind of a cost of home maintenance. And their latest index says

the cost of maintaining a home is about $6,600 a year. That seems like a lot of money. It is a lot of money. And it's up, according to this index, about 8% from a year ago. And so that is rising faster than inflation. Now, expense number four, property taxes. So homeowners pay property taxes, which is a major source of revenue for local governments. And property taxes are always something that homeowners pay and expect to pay. But those have been climbing in recent years, partly because home values have been climbing.

And so the assessed value of homes for tax purposes has been going up. And during the pandemic, a lot of people did renovations on their home. Maybe you added a bedroom, added a fancy backyard structure. That also increases the assessed value of your home. And then inflation is hitting local government budgets too. And so the taxes that homeowners are being asked to pay has gone up along with those kind of inflationary costs. And so there's a data company called Adam that tracks this. And Adam says that last year, the average property tax paid by a single-family home was $4,062. And that was up about 4% from a year earlier.

and that was up about 4% from a year earlier. For those not doing the math at home, this means that on average, homeowners face paying more than $10,000 a year just for maintenance and taxes. And that's before you get to our final expense, which might be the scariest of them all. The one that's gone up the most. The one that, if you're Indiana Jones, would be like a

pit full of snakes. Snakes. Why did it have to be snakes? Expense number five, insurance. The big uncertainty for homeowners right now is home insurance. And I think there's a lot of awareness that in places like California and Florida, there have been major issues with home insurance, with even getting home insurance at all. But it's not just in those states. It's really happening nationally that homeowners, when they're getting their insurance renewals, are seeing big jumps in their yearly bill. And it's really catching people by surprise because insurance is kind of typically one of those bills that people don't think about that much. And so people are having to suddenly pay attention to their home insurance in a way they really haven't before because they're getting these big renewal bills.

On average, the annual cost of home insurance has gone up 20% from two years ago. And Nicole has even spoken to homeowners who've seen their insurance premiums rise by over 60% in the past two years. These insurance increases sound massive. They're huge. It's not typical. This is an unusual thing happening in the insurance market. Why? Why are premiums going up so much?

There have been a lot of large natural disasters in recent years. Think about hurricanes, wildfires, but also events that maybe didn't make national news, but still cost a lot for insurance companies like hailstorms in Texas and Nebraska. Catastrophic flooding causing widespread destruction in Vermont. Homes in the southwest suburbs ripped apart. Torrential hail, relentless rain, severe weather season is here in the metro. Nature's wrath came in the form of pounding hail in Plattsmouth's Buccaneer Bay Friday evening. So it's really the accumulation of these events in recent years has meant big payouts for insurance companies.

And so they're trying to kind of recover some of that through rate increases. But also, as we were talking about with maintenance, insurance companies are seeing those rising costs too, that they're paying more for material and for labor. And insurance companies try to calculate the replacement cost of your home. That's what they try to charge you on is the cost it would take to fully rebuild your home after a disaster. And that cost is just going up. Are insurance rates going up in states that don't even have natural disasters? There are no states that don't have natural disasters.

Everywhere has natural disasters. It's just what kind. As far as insurance companies are concerned, there's catastrophe risk everywhere. Maybe it's hurricane. Maybe it's flooding. Maybe it's wildfire. Maybe it's hailstorms or tornadoes. Maybe it's a little shimmy-shake earthquake like the one we had in New York City a couple weeks ago.

Maybe it's an earthquake in New York City. But any home has natural disaster risk. And it's not just that, as you say, like the insurance bill goes up 30 percent in a year, which is a pretty big shock. But it's also the uncertainty of like, well, if it went up 30 percent this year, then how do I budget for next year and the year after that? I want to live in this home for 20 more years, but what if I can't afford to stay here because these insurance costs are going up 30% a year? What homeowners are doing about these costs is next. is next. A nice tan? Sorry, nope. But a box fan? Happily, yes. A day of sunshine? No. A box of fine wines? Yes.

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so your business insurance should be too. Whether you're a shop owner, a pet groomer, a contractor, or a consultant, you can get customized coverage for your business. Contact a licensed TD Insurance advisor to learn more. Cameron Ford, the homeowner we spoke to earlier, knows he's lucky to have a home he can afford with a modest interest rate. But that doesn't mean the pain of all these other costs going up doesn't still sting. So I know our insurance costs have increased 20% from two years ago. So from 2022 to now, those have gone up 20%. How much has it gone up in dollar figures? I think probably close to $250,000, $275,000 since two years ago. And that's a month.

Wow. How did you feel when you saw your insurance premiums going up so much? First, I was kind of angry about it. We have a fixed rate mortgage, why is this happening? I thought at first it was our insurance company's fault, but I shopped around after the second year of back-to-back increases, and that's pretty much where it's going to be no matter who we use to provide our homeowners insurance. What does that mean for your family's budget? Oh, we have to rethink the budget. You know, some of those home improvement costs and things we'd really like to get done to the home are just delayed right now until, you know, something is.

You know, something is. When you go from renting to owning, one of the things that you feel excited about is like, oh, I'm not going to, you know, be worried about getting that letter from my landlord every year, every two years, where they say, oh, your rent is going up, you know. Yes, yeah. Two, 5% or whatever.

But you still have that now. It's just like a different, like, little Grim Reaper tapping you on the shoulder, you know. That's right. Yeah, I would love to be able to point the finger at one single entity or one single cause, but I just think it's a confluence of events right now that's making it hard for,

certainly for people of my age and younger. While Cameron and his wife are cutting back in order to afford these increases, for some people, these mounting costs can be a huge problem. Nicole heard about an elderly man whose taxes and insurance alone cost more than his entire Social Security check. There are a lot of people in this country on fixed incomes or people who own their homes but are still relatively low income

who cannot afford these cost increases. As a result, some people are resorting to desperate measures. And so we are seeing in some cases people who have fully paid off their mortgage choosing to go without insurance and just saying, I can't afford these costs, so I'll just gamble and take the risk that my home won't be destroyed if there's a big natural disaster. And so that's pretty scary because it does mean that these people are fully exposed to either the cost of rebuilding if something happens to their home,

or if they choose not to rebuild, then they have to walk away and find somewhere else that they can afford to live without the benefit of an insurance payment. Have you talked to anybody who regrets buying? Yes, I have talked to people who regret buying. It's often people who bought kind of at the top of their budget and now feel maxed out, basically, in that they don't kind of have the cushion, the savings that they wish they had. But it's a tricky market, right? It's not necessarily better to sell and move somewhere else because of that high mortgage

rate and those costs. Is there anything that can be done to help resolve this situation, or are we just living in a new reality where owning a home is just crazy expensive? So some of these costs, especially the mortgage rate, could come down over time. Economists do expect lower mortgage rates by the end of the year or even next year. That doesn't mean going back to the 3% rate that we saw a couple of years ago, but there is an expectation that in a year or two, it might not be quite such a high rate for buyers, which could make that monthly mortgage payment a little bit lower. The other costs, it's harder to say. In some ways, the housing market has become more

of a luxury market. And so it's really people with high incomes or with wealth that are often able to buy in this market. And that might be, to some extent, the future that maybe homeownership is not as widely accessible as it has been in the past because of the ongoing costs. There is evidence that these increasing costs are beginning to affect the housing market, at least in some places. Like in parts of Florida and Louisiana, where insurance premiums are high, properties have been taking longer to sell. And nationwide, according to data released today,

home sales in March had their biggest decline in nearly a year and a half. What does this mean for the American dream of owning a home? Like, is that changing in a fundamental way now for people? I do think for many people, homeownership is still the dream. I think as to whether it's accessible to people making kind of typical family incomes, right now it's not really in a lot of parts of the country affordable to buy a home. And so whether that is just a new normal in America, that it is increasingly kind of only a high income experience, home ownership, or whether this is a little bit more cyclical. And so it really is, I don't want to say for sure that this is like the end of the American dream

because just a couple of years ago, it was unexpectedly affordable for a lot of people to buy a home and they did rush into the market and they did buy homes. And so we could see events like that again. But right now we are at a point with all of these other costs where it feels very frustrating for homebuyers.

That's all for today. Thursday, April 18th. The Journal is a co-production of Spotify and The Wall Street Journal. If you like our show, follow us on Spotify or wherever you get your podcasts. We're out every weekday afternoon. Thanks for listening. I'm going to go get some tea.