Affordable Housing

Housing is more affordable now than it was twenty years ago according to the New York Times article: Twenty Years Later, Buying a House Is Less of a Bite.

Despite a widespread sense that real estate has never been more expensive, families in the vast majority of the country can still buy a house for a smaller share of their income than they could have a generation ago.

A sharp fall in mortgage rates since the early 1980's, a decline in mortgage fees and a rise in incomes have more than made up for rising house prices in almost every place outside of New York, Washington, Miami and along the coast in California. These often-overlooked changes are a major reason that most economists do not expect a broad drop in prices in 2006, even though many once-booming markets on the coasts have started weakening.

The long-term decline in housing costs also helps explain why the homeownership rate remains near a record of almost 69 percent, up from 65 percent a decade ago.

Nationwide, a family earning the median income - the exact middle of all incomes - would have to spend 22 percent of its pretax pay this year on mortgage payments to buy the median-priced house, according to an analysis by Moody's Economy.com, a research company.

In high-profile places like New York and Los Angeles, home to many of the people who study and write about real estate, families buying their first home often must spend more than half of their income on mortgage payments, far more than they once did. But the places that have become less affordable over the last generation account for only a quarter of the country's population.

Elsewhere, families tend to spend far less on housing. In Dallas, the share of income needed to buy a typical house has fallen to 13 percent this year, from 14 percent in 1995 and 31 percent in 1980. In Tampa, it has dropped to 21 percent, from 26 percent in 1980. Even in New England, where the soaring prices of the last decades have frustrated many young families, house values have still not reached the heights of the early 1980's, when calculated as a share of income.

"Over 20 years, affordability has definitely improved because interest rates are much lower," said Kenneth T. Rosen, chairman of the Fisher Center for Real Estate and Urban Economic Research at the University of California, Berkeley. Houses have also grown bigger during that time, he said, so people are getting more for their money.

With many suburban houses now selling for $300,000 and up, young families have a much harder time buying their first home than they did a few years ago. Still, housing has been less expensive this year - as a share of local incomes - than at any point during the 1980's, according to Moody's Economy.com.

Beyond cost, many families who simply could not have bought a house 10 or 20 years ago find themselves able to do so, thanks to changes in the ways banks lend money. In the past, a home buyer often needed to make a down payment equal to 20 percent of a house's value to get a mortgage; today, little or no down payment is common.

The most money that Tim W. Gilbert has ever had in his possession was $15,000, he said, in the form of a check for a job he had done as a carpenter. But he and his wife, Marjorie, were still able to buy a 1936 Cape Cod-style house this year for $176,000 in Poland, about 45 minutes north of Portland.

They took out two mortgages rather than making a down payment and they use Mr. Gilbert's $5,000 or so in pretax monthly income to cover $1,600 in mortgage, tax and insurance payments. Ms. Gilbert, a writer, home schools their daughters, ages 4 and 6. "I paid rent for 18 or 19 years," Mr. Gilbert, 38, said. "We waited years and years. We wanted to make this happen."

The Moody's Economy.com calculations took into account the decline in down payment size in recent years. But even though these lower down payments mean home buyers are taking out loans equal to a larger share of a house's price than in the past, monthly payments have remained reasonable in much of the country.

The sharp fall in mortgage rates - from above 10 percent through most of the 1980's to less than 6 percent in the last few years - is the main reason. Upfront mortgage fees have also dropped to about a third of a percentage point of a loan's value, from 2.5 percent 20 years ago. Computers have made lenders more efficient, and huge pools of global capital have brought more competition to a business that was once largely local.

In a nationwide New York Times/CBS News poll conducted this month, 75 percent of respondents said they thought most families in their community spent a larger share of their income on housing now than in the 1980's. Only 5 percent said the share was smaller.

One possible reason for the perception is that many families have recently taken on mortgage debt to pay for items other than housing. Some have folded higher interest loans, like credit card debt, into their mortgage, said Mark Zandi, chief economist at Moody's Economy.com. Others have used home equity loans to pay for a new car, tuition or even a vacation.

This has caused mortgage payments to rise over the last generation - especially among high-income families, according to Federal Reserve data - for reasons besides the cost of housing.

"When you get affordability stretched so much, all the creative financing in the world can't stop some correction of house prices," Mr. Rosen, the University of California economist, said. "It happened in Hong Kong, Japan and England."

It looks as if it may not happen, though, in most of the United States.

Try this exercise: Walk into any car dealership and tell them you can not afford to buy a new car. They will find a way to make it "affordable" by stretching out the payments from 3 to 5 to even 7 years if they have to so that you can make the monthly payment. Does that really make it affordable?

"People aren't really shopping prices," said Bill Trask, a broker at Coldwell Banker Friends and Neighbors Realty in suburban Portland. "They're shopping payments."

If someone has to take out an interest only loan, a pay option arm, or do other creative financing to make it work, then perhaps that person can not really afford the house. In some locales creative financing accounts for half of new mortgages. Does that make them affordable?

Also let's not confuse affordability with value. Ownership costs vs. rental costs are at staggeringly high ratios in many areas. Can the average person really "afford" to pay 30-50% too much for a house or condo? That's how overpriced some areas are on a cost to rent basis. Can you afford to lose $100,000 on that $400,000 condo if the price drops next year? Somehow that question is not being asked.

Another question to consider that the article neglected to mention is: Can you afford to buy it and heat it and pay property taxes on it and maintain it? Even assuming one could afford the mortgage, those other expenses need to be factored in. What are heating costs and insurance costs and electrical bills and property taxes now compared to 1985? Another thing missing is how much money the median family has left is left over after paying all those things in addition to medical insurance, food, gasoline, entertainment, ect.

Let's consider this pearl of wisdom:
"Beyond cost, many families who simply could not have bought a house 10 or 20 years ago find themselves able to do so, thanks to changes in the ways banks lend money. In the past, a home buyer often needed to make a down payment equal to 20 percent of a house's value to get a mortgage; today, little or no down payment is common."

The idea presented is that loose lending standards make something more affordable. Of course that is preposterous. If someone can not afford to save a down payment, perhaps they can not really afford to make those housing payment either. If a renter can not save money for a down payment with cost of rent at huge discounts to cost to own, how can they afford to make their home mortgage payments? Teaser rates on ARMs do not cut it either. When one goes from renting to buying all kinds of expenses go up. Interest rates can and do fluctuate, and regardless of what anyone says, real estate prices do not always go up.

Nationwide, a family earning the median income - the exact middle of all incomes - would have to spend 22 percent of its pretax pay this year on mortgage payments to buy the median-priced house, according to an analysis by Moody's Economy.com, a research company.

Where is that median priced home anyway? Take the medium income then perhaps the typical person can afford the medium home in say Watonga, Oklahoma. Is that where people want to live?

Consider this justification for affordability offered in the article:
One possible reason for the perception is that many families have recently taken on mortgage debt to pay for items other than housing. Some have folded higher interest loans, like credit card debt, into their mortgage, said Mark Zandi, chief economist at Moody's Economy.com. Others have used home equity loans to pay for a new car, tuition or even a vacation.

Let's see... The median person did not have the money to pay off their credit cards, their car, their tuition, or their vacation, but somehow it is all "affordable" if they roll all that short-term debt up into their long-term house payment.

Savings rates are now negative on average, negative 1.6% or so for several months running. That is on average. Many people are obviously saving. For the average to be negative is staggering. What gives? What gives is that debt across the board is sky high and people are having a damn hard time servicing it. OK, so the house is affordable, but no one can afford to heat it or eat or send their kid to the doctor. Decisions decisions. No problem, just do a cash out refi from now until forever because home prices always go up.

Things to consider when discussing affordability

• The negative savings rate
• falling real wages
• credit card debt
• bankruptcies
• delinquencies
• medical expenses
• refis to support consumption
• rising consumer debt
  

If the biggest expense that most people have (housing) is so damn affordable why is consumer debt going through the roof? I guess it's a good thing that housing is affordable because it sure seems no one can afford to pay for anything else.

In stark contrast to the NY Times article above, check out the WSJ article Housing Affordability Hits 14-Year Low.

Housing affordability in October sank to its lowest levels since 1991, according to the National Association of Realtors' Affordability Index, a widely followed measure of the average household's ability to buy a home at current interest rates. In some areas, including New York City, Los Angeles, San Diego, San Francisco and Miami, housing affordability has dropped to levels not seen since the early to mid-1980s, according to mortgage giant Fannie Mae.

Affordability has long been a problem for low-income home buyers. But as home prices have marched steadily higher in recent years, many buyers with healthier incomes also are being squeezed. Declining affordability mainly affects whether first-time home buyers will enter the market, but in some markets people who already own a home are finding it tough to trade up.

There are signs that the growing costs of homeownership are also beginning to take a toll on the housing market. "There's a systematic erosion of affordability," says David Seiders, chief economist of the National Association of Home Builders. That decline is "the main reason ... the market is starting to cool." Mortgage applications fell to an 11-month low last week, the Mortgage Bankers Association reported yesterday, as applications to purchase homes declined.

Housing affordability fell nearly 9% in the third-quarter from the same period a year earlier, according to an analysis prepared for The Wall Street Journal by Moody's Economy.com, a unit of Moody's Corp., which adjusted the NAR Affordability Index for seasonal variations. Affordability dropped by more than 20% in nearly two-dozen markets, including Phoenix and Tucson, Ariz., Spokane, Wash., and Orlando and Lakeland, Fla., according to the study. "You have to go back 25 years to find a decline that is as significant on a percentage basis," says Mark Zandi, chief economist of Moody's Economy.com.

In Tucson, where affordability has fallen 23% over the past year, buyers in all price ranges are feeling the pinch, says Kevin Freadhoff, an agent with Long Realty Co. Mr. Freadhoff says he's currently working with eight couples who would like to buy their first home but have been priced out of the market and a dozen others who already own a home, but are having trouble trading up.

In Seattle, declining affordability is forcing many home buyers to accept longer commutes, says Jane Powers, a broker with Ewing & Clark Inc. It's also fueling price increases in outlying areas such as Bremerton, where affordability has fallen nearly 22% in the past year. And in Bergen County, N.J., where most starter homes are priced above $400,000, "prices have gone up to a point where it's pushing the first-time home buyer out of the market," says Margaret Foudy, manager of the Weichert Realtors office in Tenafly. That creates a "domino effect" as people who already own a home find it tougher to move up, says Ms. Foudy.

In 57 of 379 metro areas nationwide, homes were so expensive in the third quarter that a family earning the median income couldn't afford the median-priced home based on traditional lending standards, according to Moody's Economy.com. Sixteen markets have joined the ranks of unaffordable areas over the past year, according to the analysis.

Another major analysis of affordability, by the National Association of Home Builders and Wells Fargo, shows that just above 43% of all new and existing homes sold in the third-quarter were affordable to families earning the median income. That's the lowest level since the index was first released in 1992 and compares with 50.4% a year ago.

Some factors have helped offset the decline in affordability. Many borrowers have embraced creative mortgage products, such as interest-only loans, mortgages with teaser rates of as low as 1% and "piggyback" loans aimed at buyers who don't have the money for a down payment. In the third quarter, borrowers could boost their purchasing power by 26% by taking out an interest-only mortgage, which allows a home buyer to put off repaying principal for several years, instead of a standard mortgage, according to Moody's Economy.com.

In Tucson, roughly 60% of first-time home buyers make no down payment and instead now use 100% financing to get into the market, up from 30% two years ago, says Renee Booker, president of Long Mortgage, the mortgage arm of Long Realty.

In Spokane, where affordability fell more than 28% over the past year, many first-time home buyers are using piggyback loans and 40-year mortgages, which have smaller monthly payments than traditional 30-year mortgages, to get into the market, says Laraine Hunter, a managing broker with John L. Scott Real Estate. "We're getting creative with helping people get into homes," she says.

And renting remains a bargain in many parts of the country. Stephan Vrudny, an engineer who lives in San Diego, sold his three-bedroom condo to an investor in June for $405,000, then rented it back for $1,500 a month. Mr. Vrudny figures the arrangement is saving him $430 a month, even after taking into account the lost mortgage-interest deduction. "We'll be homeowners again when it makes sense again as an investment," says Mr. Vrudny, who had purchased the unit for $345,000 last year.

The bottom line is real wages are declining, bankruptcies are skyrocketing, consumer debt is soaring, and equity extraction from homes is used for routine consumption. This is happening in a "recovery". Something does not add up. In fact many things do not add up. Topping off the list is the idea that housing is now affordable. "There's a systematic erosion of affordability," says David Seiders, chief economist of the National Association of Home Builders. That decline is "the main reason ... the market is starting to cool." The amazing thing there is not what is being said but who is saying it.

Also note that comparing affordability now to the very peak of the interest rate cycle when interest rates were 18% is like calling the Naz at 4000 on the way down a "bargain" because it was 5000 a few months earlier. Just because something was supposedly siller at some other point in time does not mean the current conditions are affordable.

Here is another viewpoint on affordability:
Latest analysis of 299 markets: See how your hometown ranks.

In aggregate, do those markets look affordable?

By the way. I just happen to have a chart laying around. It is a bit outdated but given what has happened in the last couple years one might be able to project what it looks like now.



Gee, now what do you think that looks like now? Four standard deviations above the norm? Five? Notice who put that chart out. If anything one would expect bias to run the other way. What do you think is more accurate? That chart or the NY Times article?

Let's now take a look if there can be any possible distortions in relation to median income.
Consider this obviously made up example:

Assume there is a subdivision with one hundred houses.
Assume everyone paid $250,000 for them.
Assume that 2 households in that subdivision make $80,000.
Assume 48 households make something in excess of $80,000.
Assume the remaining 48 households make close to $20,000.

The median income is $80,000 but 48% of the people in the subdivision have way more than stretched their housing budget to buy that $250,000 home with no money down have they not?

Medians and averages can play tricks. Yes that is a made up example. But is it not possible? Considering that close to 70% of the population owns their own home and given that pay raises have not exactly be equitable or evenly distributed over these past few years, one can only wonder what percentage of people in the median priced home that really can afford to pay that median price. I believe the negative savings rate and rising consumer debt levels answer the question.

One final point: Sub-prime mortgages account for 13.4 percent of all mortgage debt outstanding according to the Mortgage Bankers Association. That is up from 2.1 percent in 1999. Is that a sign of affordability or is that a sign of speculation by lenders as well as marginal buyers all hoping without reason for prices to forever keep going up?

A couple of things have to give, and they will. They are as follows:

1. The discrepancy between rental costs and ownership costs
2. The standard deviations above norm on affordabilities

Not only will those gaps close, the bulk of it, if indeed not all of it, will close by home prices falling as opposed to rising wages. Global wage arbitrage guarantees it. The bubble areas, California, Florida, Massachusetts, Phoenix, Chicago, New York, Minneapolis, and many high population areas will be especially hard hit. The idea that the rest of the country will be spared is laughable. 40-50% of the jobs in this recovery were directly related to real estate. Many of those jobs will vanish in the upcoming consumer led recession and many people will lose their homes over it as well. Just as the downward spiral begins we see silly articles telling us how affordable thing are. I find it all rather amazing.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/