Affordability Has Nothing to do with Home Prices or Rates -RealtyTrac
Jann Swanson | Mortgage News Daily |Oct 30 2014 | link
“A real estate market that should be flying high is instead a real estate market that is faltering,” according to Brian Mushaney, Executive Vice President, Data Solutions, for RealtyTrac. Writing in the current issue of RealtyTrac’s Housing News Report he points to a market which he says should be a buyer’s paradise in many ways, with property values well below historic affordability levels, banks with tons of cash to loan, interest rates near their all-time lows, and foreclosures abating.
“So why,” he asks, writing, “have home sales stalled in recent months? It is an issue of affordability he says, but not the way we usually think about it.
The 30 percent of income as a measure of the maximum to be spent on housing doesn’t work today because markets vary enormously. The better approach is a relative measure that compares a market or a micro-market to itself rather than to other markets. He uses Omaha and San Francisco as examples of two places that are essentially incomparable. The percentage of income needed to buy in Omaha (17 percent in a recent survey) won’t work in San Francisco. Even though median household incomes are 45 percent higher in the latter area, it requires 75 percent of that median income to buy.
Looked at another way, the MIT Living Wage Calculator shows it takes $18.64 per hour for a household with two adults and two children to “make it” in Douglas County, Nebraska (Omaha) whereas the same family would need $25.44 in San Francisco.
Mushaney said that “for our purposes” affordability raises two issues. First, communities which are not affordable will soon run out of teachers, first responders and many other professionals the community needs to survive. “Second, when affordability sags you have fewer first-time buyers and that means trouble.”
RealtyTrac’s data shows that sales of lower priced houses, those most likely to be first-time purchases, have “fallen through the floor. It’s the clearest demonstration of a first-time buyer affordability gap.” And without first-time buyers there will be no buyers able to move to their second home and so on up the tiers.
So back to the issue of affordability. Home prices rose quickly last year but appreciation has slowed and real estate values have not yet reached (except in a few cities such as the major ones in Texas and in Denver) to their previous pre-crisis peaks. So property, the author says, is comparatively affordable.
Then too, “lender vaults are stuffed with cash”, perhaps as much as $2 trillion in excess funds and that has caused mortgage rates to stall in the low 4 percent range whereas just before the housing crisis (April 2007) the Freddie Mac rate was 6.18 percent. This means a huge differential in payments. A $200,000 loan in 2007 would have carried a payment of $1,222.34; at the end of this past July the Freddie Mac’s 4.12 rate would cost the borrower $958.72 each month.