Housing is Going Through the Roof!
A 50% Increase in 12 Months?!
Housing tends to be the typical American’s largest expense. The old rule of thumb was that housing costs should be about 30% of take-home pay. Yet, given the rising cost of buying, financing, and maintaining a home, homeowners are seeing this increase significantly.
As of 2021, 65.5% of American households owned and occupied their own home, down from 69.2% in 2004, but up from a 30-year low of 63.7% in 2016, as low interest rates drove an increase in home ownership in recent years.
And for these home-owning Americans, the costs are increasing significantly. I was recently at an investment conference and one of the speakers, Jeffrey Gundlach from Doubleline, commented on the rising cost of buying a house and the rising cost of financing a home. His quick analysis suggested that since housing pricing increased 15% over the last 12 months while we saw 30-year mortgage rates increase from 3% to 5% over the same period, total mortgage payments increased about 50%! That is a big jump in costs in just 12 months!
But Wait... There’s More!
While this is a big increase, I think Mr. Gundlach actually is actually understating the total increase in home ownership that we are experiencing. Here is why.
Mr. Gundlach was only talking about the mortgage payment, which is generally the largest portion of housing-related costs. Yet, home ownership entails many, many more costs - costs that are experiencing various rates of inflation. The total cost of ownership also includes items such as:
Homeowner Insurance
Property Taxes
HOA Fees
Repair Costs (periodic for appliances, HVAC, roof, paint)
Utilities (electricity, water, sewage)
Maintenance Costs (yard care, air filters, pest control, cleaning)
So, I wanted to better understand how total housing costs are impacting homeowners, specifically in Texas. Here is the summary of my research.
Total Housing Cost Increases (from a Texan Perspective)
Over the last year, we have seen the average home price in Texas increase from $274,030 to $325,000. This is an increase of 18.6%, slightly higher than the national average. We have also seen increases from 2021 to 2022 in almost all the costs associated with home ownership:
Click to enlarge.
Homeowners Insurance - 11.7% Increase
Insurance costs increased 11.7% (Source: Bankrate), driven by the increase in home prices and overall rising repair costs.
Property Taxes - 10% Increase
These taxes are tied to property values, but valuation increases are capped at a 10% per year increase in Texas. Let’s assume a 10% increase, which lags the increase in property values, so keep in mind that these are likely to continue to go up.
HOA Fees - 10% Increase
A 2021 Texas law requires more disclosure from HOA Boards of Directors, but there is no limit on rate increases as long as they can be justified. Fees vary wildly based on amenities provided, and they range from $10-600 per month, with an average of $250/month for a single-family home, according to iProperty Management. Based on various news stories, I found increases in HOA fees from 5% to 100%, but I will assume a 10% increase on average and an average of $200 per month.
Repair Costs - 20% Increase
These are not necessarily annual expenses but are real costs and something to consider in a home budget. Traditionally, the assumption was about $1/per sqft of home per year; or 1% of the home value for newer homes. With increasing costs of lumber, parts, and labor, costs have increased by 20-25% year over year. I will assume a 20% increase.
Utilities (electricity, natural gas) - 6% Increase
Energy costs have increased by 8%, according to USEAI, driven by higher natural gas prices. Water prices have actually come down slightly in Texas. Trash service has remained flat (for now).
Maintenance Costs (e.g. lawn care, pest control) - 10% Increase
Driven by demand, fuel, parts, and labor, Texas is seeing 10-15% increases in costs year-over-year.
What Does This Mean? The Increase in Total Home Ownership Cost
| 2021 | 2022 | % Change | |
|---|---|---|---|
| Average Home Cost | $ 274,030 | $ 325,000 | 19% |
| Annual Costs of Ownership | 2021 | 2022 | % Change |
| Mortgage Payment | $ 11,091 | $ 16,749 | 51% |
| Insurance | $ 2,105 | $ 2,351 | 12% |
| Property Taxes | $ 6,029 | $ 6,632 | 10% |
| HOA Fees | $ 2,400 | $ 2,640 | 10% |
| Repairs (Budgeted) | $ 2,740 | $ 3,288 | 20% |
| Utilities, Water, Waste | $ 3,495 | $ 3,719 | 6% |
| Maintenance | $ 3,726 | $ 4,099 | 10% |
| Total Costs of Ownership | $ 31,586 | $ 39,477 | 25% |
| Percent of Household Pay | 39% | 46% | 19% |
The median household income for homeowners in Texas is $86,100 in 2022, which is an increase of 5% from 2021. Let’s assume they buy the average house with a 30-year mortgage and 20% down, and then compare ownership in 2021 versus 2022. Using average “everything” and changes in costs from 2021 to 2022, the total cost of home ownership increases from 39% of gross household income to 46%, or an extra $8,000 per year!
Mr. Gundlach was right in that mortgage payments are significant, representing 42% of the total costs in 2022, and 72% of my estimate of the year-over-year increase, but other costs are increasing as well. And unlike a fixed-rate mortgage, these other costs will likely continue to go up every year and thus will consume an increasingly larger portion of your take-home pay, unless your take-home pay increases more rapidly.
When Buying, Consider All of the Costs of Ownership
In Texas, we often boast about our affordable housing. Based on price per square foot, we are generally lower cost. But property tax rates are the 7th highest in the nation and insurance is the 14th highest in the nation (Source: Bankrate).
Additionally, we tend to buy bigger homes (5th in the nation). Homeowners will continue to feel more pain, if inflation continues, as these costs - many of which are very much tied to the size of the house - will continue to rise with inflation.
Inflation is having very broad impacts. Before buying a home, make sure you look beyond the increased mortgage costs and into all the other costs of owning and maintaining your new home as well. And think smaller to give yourself some cushion and financial relief so that you can comfortably enjoy your home.
