Where Do We Make Our Next Move?
Almost every day there are news articles published that talk about the carnage in the housing market from drying up mortgage businesses and reduced home sales due to increasing interest rates. The threat of recession is looming and no one really knows what 2023 and beyond will bring.
In 2020, the median price of a single family home in the US was $300,200 with average 30-year mortgage rates at 3.1%. Today, a median home is priced at $391,000 with an average 6.2% 30-year mortgage rate. This means that if you purchased a home two years ago with 20% down, the purchase would have cost you $430,000 in total down payment, principal and interest over the course of the loan whereas in today’s market, the median home now at $391,000 will cost $770,000 over the same term! It is a mind boggling difference in a very short amount of time.
The gap is even bigger in some areas of the country where there is a strong economy, low unemployment and a shortage of housing for a growing population, including the millennial population that is moving into their prime home buying years. The affordability has decreased by more than 40% as people have to spend more share of their income on housing. Markets such as Boulder, CO and Seattle, WA have 58% share of median annual income that is going towards housing costs.
Despite the doom and gloom, there are slivers of hope. At Rook Capital we are working on a shared equity home purchase solution that will help people get into homes today by bridging this gap with the help of community driven investments.
We are committed to solving the affordability crisis by focusing on markets that have become highly unaffordable, markets where the supply is low, the demand is high, there is population growth and low unemployment. Historically, these markets have also been more price stable and have a faster recovery period despite the volatility in the housing market during the 2008 crash.
In order to pick these select markets, the data science team at Rook analyzed the last 20 years of historical home pricing data across 3,000+ counties in the US. We segmented these counties based on historical return, risk, max drawdown, supply and demand indicators over different time periods into 3 market segments. Max drawdown is the downside risk of an investment and is measured by calculating the biggest loss from peak to trough over a given time period. We are looking for markets that have lower relative drawdown so there is a reduced chance of investment loss.
The market segment that has been most price stable, such as Boulder, CO, through the Great Financial Crisis has had a median drawdown of -5% compared to -65% for the segment that consists of markets such as Las Vegas, NV and Phoenix, AZ. The average drawdown across the entire US was -24% over the same period. Understanding the risk and return of these different markets helps us focus our attention initially on those markets that we believe will be less risky for our investors in the light of the current market conditions.
After selecting a market/region, we further break down our analysis on the census block group level to understand the local market dynamics. Real estate is hyper local and so two neighborhoods/properties within the same area can perform very differently for many different reasons. We capture those nuances around localized appreciation and risks. Those data points are fed into our Rook Shared Value Investment™ Offer calculation for a property.
As the dust settles in the housing market, Rook’s mission is to expand across the country and bring our solution to everyone. We’d love to hear from you on where we should launch next.
Rook and its community of investors are currently helping homebuyers buy the home of their dreams in the Boulder, Fort Collins and Denver markets in Colorado. Please reach out to us, if you are interested in learning more!