Affordability Has Nothing to do with Home Prices or Rates -RealtyTrac

“A real estate market that should be flying high isrninstead a real estate market that is faltering,” according to Brian Mushaney,rnExecutive Vice President, Data Solutions, for RealtyTrac. Writing in therncurrent issue of RealtyTrac’s HousingrnNews Report he points to a market which he says should be a buyer’srnparadise in many ways, with property values well below historic affordabilityrnlevels, banks with tons of cash to loan, interest rates near their all-timernlows, and foreclosures abating. </p

 “So why,” hernasks, writing, “have home sales stalled in recent months?  It is an issue of affordability he says, butrnnot the way we usually think about it.  </p

The 30 percent of income as a measure of the maximumrnto be spent on housing doesn’t work today because markets vary enormously. The<bbetter approach is a relative measure that compares a market or a micro-marketrnto itself rather than to other markets. rnHe uses Omaha and San Francisco as examples of two places that arernessentially incomparable.  The percentagernof income needed to buy in Omaha (17 percent in a recent survey) won’t work inrnSan Francisco.  Even though medianrnhousehold incomes are 45 percent higher in the latter area, it requires 75rnpercent of that median income to buy.  </p

Looked at another way, the MIT Living WagernCalculator shows it takes $18.64 per hour for a household with two adults andrntwo children to “make it” in Douglas County, Nebraska (Omaha) whereas the samernfamily would need $25.44 in San Francisco.</p

Mushaney said that “for our purposes” affordabilityrnraises two issues.  First, communitiesrnwhich are not affordable will soon run out of teachers, first responders andrnmany other professionals the community needs to survive.  “Second, when affordability sags you havernfewer first-time buyers and that means trouble.”</p

RealtyTrac’s data shows that sales of lower pricedrnhouses, those most likely to be first-time purchases, have “fallen through thernfloor.  It’s the clearest demonstrationrnof a first-time buyer affordability gap.” rnAnd without first-time buyers there will be no buyers able to move torntheir second home and so on up the tiers.</p

So back to the issue of affordability.  Home prices rose quickly last year butrnappreciation has slowed and real estate values have not yet reached (except inrna few cities such as the major ones in Texas and in Denver) to their previousrnpre-crisis peaks.  So property, thernauthor says, is comparatively affordable.</p

Then too, “lender vaults are stuffed with cash”,rnperhaps as much as $2 trillion in excess funds and that has caused mortgagernrates to stall in the low 4 percent range whereas just before the housingrncrisis (April 2007) the Freddie Mac rate was 6.18 percent.  This means a huge differential inrnpayments.  A $200,000 loan in 2007 wouldrnhave carried a payment of $1,222.34; at the end of this past July the FreddiernMac’s 4.12 rate would cost the borrower $958.72 each month.  </p

While today’s rates are higher than in 2012 the morernimportant point, he says, is that the average mortgage rate over the past 40rnyears has been 8.6 percent so rates today represent a better than 50 percentrndiscount.  Therefore mortgages arernaffordable too.</p

So Mushaney says, if home prices are down from 2007 andrnmortgages rates are half off of historic norms then affordability “should bernsoaring.”  But that is not the case.  “The problem is that in a market filled withrngreat real estate deals and cheap financing incomes are down.”  The national average income in 2012 was $51,017,rn9 percent lower than in 1999 while buying power has declined even more.  It takes $1,430 today to purchase goods andrnservices costing $1,000 in 1999.</p

A RealtyTrac analysis of median household incomesrnshows a decrease in real terms in 43 percent of the nation’s 3,100 countiesrnbetween 2008 and 2012.  “Among allrncounties, even those with increasing income, the average change in income wasrnjust 2 percent.”  During the same periodrnthe Consumer Price Index increased 9 percent as median home prices dropped 22rnpercent.  Since 2012 home prices havernbounced back by 22 percent while the CPI has risen 3 percent.  Median income data is not available post 2012rnbut Mushaney says it is unlikely it has jumped 10 percent in two years to catchrnit up with the 12 percent rise in the CPI since 2008.  The bottom line, he says, is that consumersrnnow need to spend more of their income on other goods and services and havernless left over for housing than before the recession.  </p

He concludes that the core barrier to higher realrnestate sales has nothing to do with home prices or mortgage rates but ratherrnwith jobs and income.  “Simply put, werndon’t have enough jobs, the job we do have don’t pay enough, and the result isrnthat homeownership levels are at their lowest point in 19 years.”

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