Bigger, Better and Costlier
It is definitely true that there are big price increases in frum real estate markets. Driven by high demand from the growth of the kehilla, new construction homes are often 50%-100% above where they were ten to fifteen years ago. However, the rising home prices also reflect a significant increase in both the average size and luxury finish of today’s new construction. Newly constructed homes of the 1990s were about 2,000 square feet, and those built around 2005 averaged some 2,500 square feet. Today, many new houses are well over 3,000 square feet: a 20-50% increase. A much larger house will naturally have a much greater price tag. Also, it has become more common to include high-end finishes such as high ceilings, moldings, granite counters, and other expensive upgrades, adding to the final purchase cost. That being said, how can so many afford these beautiful but pricey homes?
What Counts is the Monthly Payment
While real estate prices have exploded, the financial burden of a home purchase is not the sale price but the size of the 360 monthly payments required to pay off a mortgage. And surprisingly, monthly mortgage payment obligations have not gone up nearly as much as home prices over the past two decades. A typical home-buyer in Lakewood today likely has a much larger mortgage than ten years ago but a mortgage PAYMENT burden pretty close to the ones existing ten years ago. This paradox is possible due to two factors: much lower interest rates and basement rentals. Over the past twenty years, long-term mortgage rates fell from 8% to about 3.5%. For example, a family bought a $300,000 ranch in 2007 when rates were a relatively high 6%. Therefore, despite having a much more modest home, their monthly payments of $1,619 (10% down, $270,000 @ 6% for 30 years) is only one third lower than current monthly payments of $2,425 ($540,[email protected]%). Especially considering inflation, this is not an enormous difference in expense. But wait, there is more!
Although current mortgage payment is $800 larger, much or all of this can be covered by their rent-able basement (or two!). Buyers count on the additional rental income to help cover monthly mortgage payments, and while the rental market has softened recently, most basements are profitably rented at any given time. This combination of low rates and rental income is how many young couples have been able to afford new homes despite high prices, and it puts a whole new perspective on purchase decisions. Far from being profligate, it may be savvy and foreseeing. Using low-interest rates and the basement as a source of income, it is possible afford a much more spacious and valuable home. And when the mortgage is paid off, the basement rental income can be shifted from paying for the house toward living expenses or support for newlywed children!
Bigger Is Not So Simple
Not necessarily is buying a large home with a huge mortgage and a basement rental the better route. You have to come up with a much more substantial down payment and need to be able to carry the additional property taxes, maintenance, and utilities of a larger home. Also, counting on a basement rental to cover a mortgage is somewhat risky. There will be months when there is a vacancy, and there will be renovation costs to pay when tenants move. Unless you set aside a reserve fund, you will face some tight spots here and there. On a personal note, living on top of your tenant may lead to some awkwardness. By not having to share close quarters with another family, a family can retain all of their privacy.
But Do Refinance
But is definitely worthwhile to research a possible refinance of your mortgage. Converting the loan balance to lower rates will save hundreds of dollars monthly for the life of the mortgage! Another refinance option would be to borrow additional funds to build the home extension you might wish for. If you can find lower rates you can borrow this extra cash without any increase in your monthly payments.
Note: this article was written in 2017 from the perspective of Lakewood’s unique housing market but much of it holds likely true in Monsey , Staten Island and elsewhere.