Hey, guys.
So today we're going to talk about one big indicator that I use all the time
to search for rental housing and areas that I want to buy.
So there's lots of indicators, but one that you should be definitely watching,
especially now is what they call the Housing
Opportunity Index or HOI.
In my mind, the Housing Opportunity Index doesn't take it quite so far,
but that's what I'm going to do for you now.
So you can see how I use this data and use it for my investing criteria.
So what is the Housing Opportunity Index?
Well, it started with the National
Association of Home Builders, which is obviously the cost of housing
and Wells Fargo, because, of course, they are lenders.
So when you blend these two,
it's a great indicator of where people are in certain markets.
So this index for a given area is defined as the share of homes sold
in that area that would have been affordable
to a family earning a local media an income based on a standard mortgage
underwriting criteria, which we'll talk about in a minute.
So therefore, there are really two
major components, income and housing costs,
and that's median income and housing costs for a certain area.
So one of the reasons I really liked this index is because it covers
240 metro housing areas.
So it's very good data across the United States.
It's not completely comprehensive, but it's very good and covers 240 areas.
But there's one big flaw in this indicator and that is
of course interest rates, which isn't even addressed here.
So let's talk about that next.
So the chart on the left here from the St Louis Fed is the 30 year
fixed rate mortgage average in the US and you can see it's
bounced all over from the seventies all the way through 20, 22.
What I want to bring your attention to
is this little area right here at the end that hardly looks like anything.
But if you take a look at it, the way median home prices have gone up,
it's significant so the chart on the right is blown up
and represents the last two years and it's also the 30 rate, fixed rate
mortgage, the average as you can see, it's really started to spike here.
And the Fed of course has met twice in the last
four months and raised these rates another three quarters percent.
So why is this important
because as you start to look at the rising house prices of homes sold
and you start to see how interest rates affect them from a mortgage standpoint,
then the housing opportunity index spreads become even worse
for homeowners, therefore pushing many of these people into rentals.
So next, I'm going to show you
exactly how I used this information to go find properties.
But before I do that, hit the like subscribe
and notification bells just to get my numbers up just a little.
And thanks, guys.
So let's dig in a little more specific so you can see exactly how this data is used
before I show you the chart.
So the National Association of Home Builders assume that a family can afford
to spend up to 28% of its gross annual income on housing.
This is in portant.
As you guys know, this percentage can change from person to person,
but we have to assume something so you can track the data
accurately year over year.
Then you take that share of the median income and you divide
that by 12 to arrive to a monthly figure.
So let's assume for a moment that a family's annual gross income
is $100,000, 28% of that
is $28,000 divided by 12,
which is $2,333 for their mortgage
the second calculator our housing cost
and it takes into consideration the price of homes and the interest rate.
So the prices of a new and existing home sold are collected from the actual court
records from CoreLogic a data and analytics company.
So this housing opportunity index takes
the price of existing and new homes and the average mortgage payment
that you would have based on the interest rate and looks at it
as it's compared to the median income for a family
and of course what they can afford on a monthly basis.
So when I was researching this video, I had to laugh at the last part of this
because it says today's mortgage rates are the lowest they have ever been
and have been a huge impact on housing affordability.
And I kept us in here.
So you can see that that was once the case, but not anymore.
As these rates go up, affordability goes down
and pushes more people into rental housing.
So now let's look at the chart.
As you can see, if I'm going back to just 2012.
So just ten years ago you can kind of see the median sales price
now of course this is across the US, but you can see how they've grown
over that period of time, over that ten year period of time.
But the Housing Opportunity Index has steadily gone down
and the gap has gotten wider and wider and wider.
One thing this chart does not reflect of course
is the second quarter of 20, 22 because we're still in the middle of it.
So what does all this mean and why is it important?
So as I take a look
at these different cities, so on the left here are the ten most affordable
metro areas by using the Housing Opportunity Index
and to the right are the ten least affordable metro areas.
By using the housing opportunity index so you as a landlord
want to be buying properties in this category over here
because what you're trying to do is you're trying to find housing
that's the highest price, especially now with these interest rates.
The mortgages are going to be even more.
What you're trying to do is find the biggest gap
between the mortgage and the rent for example, if the mortgages over here
are five or $6,000 a month, let's say, and the rents are 2000,
then that would be three to 4000
gap between rental and mortgage.
Over here, the rents might be, let's say a thousand,
but the mortgages would be closer to 2000 so over here
there's $1,000 gap between rental and mortgage.
And over here you can have a three or $4,000 gap between rental and mortgage.
So as a landlord, I'm trying to focus on these areas here
because from a turnover standpoint, you want as many people
to stay in your rental long term to create stability from a cash flow standpoint,
if you're looking at it from a landlord standpoint,
from a renter standpoint, you're obviously looking over here
because you're trying to spend as little as you can on rent.
So this is one of the little secrets that you've got
from me on how I take a look at these individual markets.
These mortgages are growing even higher than the rent growth
that we're seeing in many of those metro areas.
Now with these rising interest rates, as I pointed out earlier,
then these mortgage payments are actually becoming bigger and bigger
driving a bigger gap between the renter and the mortgage payment.
Now, that is happening on both sides of the equation.
But the point is you want to pay attention to that.
So the next chart that you should be looking at for yourself would be to take
a look at average rents in these areas and compare them with the mortgages.
So that will give you the true gap by sub market.
So lastly, as you can imagine, the least affordable metro areas
are the more stable rental markets from a landlord standpoint.
So these folks will have a harder time because they have to qualify
to buy these homes
which are more expensive and of course have higher mortgage payments.
And these interest rates are making it even worse
for these renters that live in these markets.
So as always, I hope you enjoyed it. Please hit the like
subscribe and notification bells and we'll see you next time.