I was drinking my coffee and crunching on a bagel the other morning. Deb was deep in the morning paper when she sort of gasped and said “the median price of a home here in GJ has gone up by $32,000 since last January.” That increase was the amount we paid for our first house, in total! So now the median price of a home here in Grand Junction, CO is just north of $330,000.
In an earlier life, I was the manager of a savings and loan here in GJ. As part of that job, I did mortgage loans for people. Typically, we required a down payment on the house of 10% and preferred 20%. Another part of qualifying was that the monthly payment couldn’t exceed 30% of your monthly income. As a financial planner, I prefer it not exceed 25% of my client’s monthly income. So let’s take just those two factors and see what it will take to qualify for a mortgage on the median priced home here in GJ.
The math on the down payment is straight forward. 10% of $330,000 is $33,000. 20% would be $66,000. The next part is a bit more difficult, but I have a wonderful calculator that makes it easy. If we use 10% down on a $330,000 home, the borrowed amount on the property would be$297,000. Current mortgage rates are around 3.25% for a 30 year fixed rate loan. That would make the monthly principal and interest payment on the $297,000 loan $1,290.93.
Property taxes and insurance are usually escrowed in the payment and would likely add another $200 per month to the payment, so now you’re at $1,490.93 per month for a house payment. For easy math, let’s round that to $1,500. To keep the payment at 25% of your monthly income, you would need to make $6,000 a month. If we use the higher 30%, then you would need to make $5,000 a month.
The median household here in GJ in 2019 was $57,359. That is $4,779.92 a month. That makes the monthly payment of a median priced home here in GJ 31% of your monthly income. So basically, half of the households here in GJ can’t qualify for a loan on the median priced home. And we haven’t even addressed the $33,000 down payment – how many people have that in the bank?
The rise in prices recently is attributable to a pent up demand that was held back by the pandemic. Add to that the fact that building came to a near stop during the early days of the pandemic and hasn’t yet caught up with demand. Too many people chasing too few houses means higher prices. The demand for housing has also caused the rents to go up and vacancies to come down. Low mortgage rates has also brought more buyers into the market and allowing them to afford higher priced homes. Again, more money chasing fewer homes.
Inflation is here and the Fed will have to raise rates to combat it. That means mortgage rates will move higher. As that happens, people will be able to afford less in a house. It will even drive some people out of the market. Demand will cool and prices will begin to come down. How far will prices drop? Who knows? But my advice to would be buyers, especially people looking for that “starter” home, would be to sit tight for the next year or so. Save up your money for that down payment and let prices come back a bit. Keep your credit report clean and be ready to move.
These are the opinions of Legacy Wealth Management, LLC and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice.
Mike Berry is a Registered Representative offering securities through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Legacy Wealth Management, LLC and Cambridge are not affiliated. Cambridge does not offer tax advice.
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