Tuesday, December 13, 2011

Payments for a New House Have Never Been Lower

The chart above shows another measure of housing affordability over time by displaying the monthly mortgage payments (adjusted for inflation) for a median-priced new home (Census data here) financed at the prevailing 30-year mortgage rate in each month back to January 1978, assuming a 20% down payment.  Payments today for a $212,300 median-price new home purchased in October with a 20% down payment and a 4.07% fixed-rate 30-year mortgage would be $817.71, the lowest in the history of this series back to 1978.  It's only been since 2009 that payments have remained mostly below $1,000 per month, and the October payment is about 38% below the average of $1,375 per month over the last 33 years. 

The incredible housing affordability today, at least for middle-income, first-time home buyers, seems to be an under-reported and under-appreciated story.  As I reported previously, I'm suggesting that the incredible affordability of housing has to counteract and offset some of the "gloom and doom" about younger generations being worse off than their parents, stagnating income, increasing income inequality, the necessity of a dual-earner household to survive financially and the dangers of inflation.   

Update: The chart below shows monthly payments under two assumptions: a) median-priced new home with 20% down ($42,460), and b) a new home purchased at 50% of median-price, 3% down payment (about $3,000).  The outcome and trend is the same: the lowest inflation-adjusted monthly payments in history.



39 Comments:

At 12/13/2011 6:18 PM, Blogger Walt G. said...

I came up with $1022.14 monthly payments for a 30-year loan for $212,300 at 4.07%. How did you come up with $817.71?

 
At 12/13/2011 6:20 PM, Blogger Mark J. Perry said...

20% down payment.

 
At 12/13/2011 6:29 PM, Blogger Adam said...

Mortgage costs have fallen, but what have the other costs of home ownership done in the same time period? ie. property taxes

 
At 12/13/2011 6:32 PM, Blogger Walt G. said...

Oops, I must have missed where the down payment was stated earlier.

Coming up with $42,460 and closing costs is going to seriously limit the pool of people who have that kind of dough and affect the affordability aspect of home ownership.

 
At 12/13/2011 7:13 PM, Blogger PeakTrader said...

After the 2006 peak, will it finally bottom next year?:

Nearly 29% of mortgaged homes underwater, report finds
Nov 7, 2011

A whopping 28.6 percent of homeowners with mortgages owe more on their loans than their homes could sell for, according to quarterly data released by Zillow, a real estate website.

That's up from 26.8 percent in the second quarter.

Home values declined only 0.2 percent from the second quarter but were down 4.4 percent year over year.

In several cities, more than half of all homes with mortgages are underwater, including Phoenix (66.2 percent), Atlanta (58.7 percent), Riverside, Calif. (51.4 percent), Tampa (56.5 percent) and Sacramento (50.9 percent).

Other big metro areas with a high percentage of underwater homes include Miami-Fort Lauderdale (46.7 percent), Chicago (46.2 pecent), Cleveland (41.5 percent) and Denver (38.5 percent).

Zillow chief economist Stan Humphries (says) "We're in uncharted waters."

Homes with underwater status are often considered risks for future foreclosure.

Humphries estimates that home values will bottom out in 2012 at the earliest and said the foreclosure market will remain "robust" for the next two to four years.

 
At 12/13/2011 7:29 PM, Blogger Mark J. Perry said...

Sure, but home buyers don't: a) have to spend $213,300 in most markets, b) they don't have to buy a new home, and c) they don't have to put 20% down, they can put 3-5% down with FHA, 0% down with VA. But to compare monthly payments over time, some consistent assumptions have to be made, and 20% down is the standard assumption of the housing affordability index of the National Association of Realtors, so I used that.

With different assumptions like: a) 3% down and b) the purchase of a home that costs 50% of the median-price home, the trend in the graph would look exactly the same, the line would shift down with the exact same trend, and the exact same main result: lower monthly payments today than ever before (see new chart).

 
At 12/13/2011 7:54 PM, Blogger Che is dead said...

"Sure, but home buyers ... don't have to put 20% down, they can put 3-5% down with FHA, 0% down with VA." -- Dr. Perry

Isn't that, in part, how we got into this mess?

 
At 12/13/2011 8:03 PM, Blogger Benjamin said...

Real estate may be a hinting buy at this point.

We got into this mess by poor underwriting, and a Fed hat decided to "fight inflation" (due to global commodity prices) at exactly the wrong juncture.

The result was commodity prices did what they do, and that is respond to global demands (we are not the world), and the Fed successfully tanked USA real estate, both commercial and residential, leading to the bust in the general economy, which was weakening anyway due to tight money.

 
At 12/13/2011 10:00 PM, Blogger Hydra said...

Middle income first buyers.....

That is much better than your previous post.

 
At 12/13/2011 10:02 PM, Blogger Hydra said...

Middle income first buyers.....

That is much better than your previous post.

 
At 12/14/2011 3:12 AM, Blogger PeakTrader said...

Che says: "Isn't that, in part, how we got into this mess?"

Do you want rain in a flood or a drought?

 
At 12/14/2011 6:58 AM, Blogger Walt G. said...

As long as people buy a primary home for shelter and not an investment, I agree that now is a great time for employed first-time homebuyers who have excellent credit to buy.

I shifted my home from my asset column over to my liability column many years ago after analyzing my historical homeownership cash flows and realizing I had to have some place to live even if I sold my house (cash was only flowing out). If you try to use your home as an investment, you might have an unpleasant surprise waiting for you. I keep my real estate income earning and growth potential invested in REITs.

 
At 12/14/2011 9:19 AM, Blogger juandos said...

Maybe there's a dire need to go back and look at housing stats if this CNBC article is factual...

Realtors: We Overcounted Home Sales for Five Years

"All the sales and inventory data that have been reported since January 2007 are being downwardly revised. Sales were weaker than people thought," NAR spokesman Walter Malony told Reuters.

 
At 12/14/2011 9:20 AM, Blogger morganovich said...

and yet sales are at rock bottom.

new home sales are at a post war low.

existing home sales are punk, and worse, look to be revised down up to 20% for the whole period since 2007 due to double counting and other statistical mishandling.

http://www.cnbc.com/id/45659547

the fact is that these great deals are not driving any demand.

unless housing demand is totally price inelastic (which seems pretty far fetched) i think we have to ask what is preventing the market from clearing.

there is clearly a severe demand problem here.

very few are taking advantage of these prices.

 
At 12/14/2011 9:39 AM, Blogger morganovich said...

http://www.crgraphs.com/search?updated-max=2011-10-07T17:15:00-07:00&max-results=1

new home sales still scraping along a post ww2 low.

they are down a staggering 80% since 2006 and showing no sings of recover at all.

they are 25% below levels seen in 1970 despite 50% population growth since then.

these are literally staggering numbers.

annual sales are about 300k. that's 0.1% of the us population and maybe 0.3% of households.

these prices may be cheap, but they are going to have essentially zero effect on the economy as a whole.

the problem with these markets is that they do not respond to price in the way the market for, say, burgers does.

drop the price of a burger 50% and demand would go way up.

but in housing, especially with so many folks already underwater (28%) and with sub 10% home equity (prob 50%), price drops only make things worse.

housing works more like the stock market.

when the S+P drops 20%, sure stocks are cheaper, but the average portfolio just dropped 20% too, so there is no new buying power.

each drop in home prices right now takes down the value of 140 million homes. 4-5 million trade annually. for every guy getting a deal, 28 guys lose.

your currency depreciates as rapidly as prices drop. this swamps anything interest rates can do, especially as so many are unable to come up with a down-payment.

you have to think of this like really expensive points. maybe you save $5-6k a year on your new mortgage, but it cost you $100k in home equity to get it. that's not a terribly attractive deal.

therein lies the explanation for such punk demand in response to "affordability". it was paid for heavily somewhere else.

 
At 12/14/2011 11:29 AM, Blogger juandos said...

"unless housing demand is totally price inelastic (which seems pretty far fetched) i think we have to ask what is preventing the market from clearing"...

Well morganovich I wonder if to some degree if the federal government might still be causing pricing inelasticity in housing prices?

Back in Feb. of this year the WSJ ran this story and I wonder if it is still in effect?

Number of the Week: Government’s Overwhelming Role in Mortgages

 
At 12/14/2011 12:03 PM, Blogger morganovich said...

juandos-

i don't understand your argument.

there is no question that the government (through freddy and fannie) is the one driving mortgage rates to record lows.

but why does that matter to a consumer? they just care about the rate and home price which determine the mortgage payment.

why would they care who the mortgage comes from?

there is no question that the price of loan has dropped (though i hate the inflation adjusted "affordability" metrics mark like to use as they can create some very perverse trends. eg if income is down but inflation up, that is not more affordable. you cannot assume that wages have tracked inflation lately).

the question is why the drop in price has not driven any demand.

i don't see why the source of the loan there matters much unless you are claiming that F+F have higher credit and down-payment requirements and that is gumming up the market.

 
At 12/14/2011 12:33 PM, Blogger juandos said...

"but why does that matter to a consumer? they just care about the rate and home price which determine the mortgage payment"...

Well morganovich though I'm not a homeowner but many people I know are and each and everyone of those people not only consider that house a home but also as important its considered an investment...

Who wants a depreciating investment?

 
At 12/14/2011 12:52 PM, Blogger Walt G. said...

juandos,

How is a house a good investment? If and when you sell after an unknown period of time for maybe more than you paid, you still have to have a place to live, and you have cash outflows all the while you own it. When it comes down to it, we are all renters (just ask someone who "paid off" their house about their continuing property tax and insurance payments).

 
At 12/14/2011 1:02 PM, Blogger VangelV said...

The incredible housing affordability today, at least for middle-income, first-time home buyers, seems to be an under-reported and under-appreciated story.

This could be because of the implications. The US has seen a huge housing bust, which was hyped by the media for years as prices kept rising. Some of the people who hyped the story must have a sense of shame and would find it distasteful to hype the collapse in the price level as good news when they were saying the opposite not too long ago.

Of course, the big problem for most people is that they have homes that are now selling for much less than they used to. And even though the cost of financing may have fallen the cost of insurance, property taxes, and utilities has gone up. Those that have houses that are worth less than the mortgage amount feel stuck because they do not want to take the loss. As such mobility is lower.

On the good side the lower financing costs are great for new buyers but only if they can qualify and put down the down payment. That number is very small and of those that can take advantage many prefer the mobility and the flexibility of renting.

 
At 12/14/2011 1:07 PM, Blogger juandos said...

"How is a house a good investment?"...

Well walt g I said I wasn't a homeowner so I'm guessing here (after listening to endless conversations by homeowners) but it seems that people who also consider a home an investment think they're going to make a profit from selling their bigger homes and have money left over to move into a smaller, more utilitarian space once the afflictions are gone from the nest...

 
At 12/14/2011 1:50 PM, Blogger Walt G. said...

juandos,

Current conditions would indicate some people thought wrong. Even in the past, a simple visual cash flow analysis would show many small cash outflows with one larger cash inflow at the end that does not add up to all the small ones. Good investments don't look like that.

 
At 12/14/2011 2:32 PM, Blogger juandos said...

"Even in the past, a simple visual cash flow analysis would show many small cash outflows with one larger cash inflow at the end that does not add up to all the small ones"...

Why do you think I never bought a house?

People don't take into account the amount of time and money they throw into their house year after year and people who bought houses 20 and 30 years ago can't be convinced of that fact that the return on home ownership is by and large a non starter as investments go...

 
At 12/14/2011 2:45 PM, Blogger morganovich said...

juandos-

i get the part about a depreciating investment, but what does that have to do with freddy and fannie?

that seems like a totally orthogonal issue.

you had argued that the feds were causing price inelasticity. i don;t see what that has to do with depreciation.

 
At 12/14/2011 2:51 PM, Blogger Walt G. said...

I bought my house, but I don't consider it an investment any more than I consider food an investment.

Buying might or might not be better than renting when everything is considered (a lot of that is emotional). It's best to invest projecting positive returns, and houses that are used for primary shelter just do not do that.

 
At 12/14/2011 2:51 PM, Blogger Hydra said...

the return on home ownership is by and large a non starter as investments go...

================================

Beats the hell out of investing in rent.



Isn't that, in part, how we got into this mess?


In part, but it is a pretty small part. The biggest cause of this mess is fear.

 
At 12/14/2011 2:51 PM, Blogger morganovich said...

""Even in the past, a simple visual cash flow analysis would show many small cash outflows with one larger cash inflow at the end that does not add up to all the small ones"..."

it's not quite that simple though.

i assume you pay rent. that is a cost for which you get near term shelter, but then nothing.

it's money that is just gone.

let's take the simplest case in which a home does not change in value at all.

if you can make a mortgage payment = rent, then you are better off owning, as some of that is principal and will come back to you.

there is some ratio of mortgage payment/rent where mortgage payment > rent where you reach parity (depending on the % of principal in the payments, the opportunity cost of other investment etc), but it can be totally rational to pay more for a mortgage than for rent as an investment.

if you believe that prices will rise, then it gets a bit more complex (especially as the leverage is very high. 100k down on a $1mm house means 3% appreciation is 30% roic), but this, of course also works in reverse.

add in tax benefit etc and there can be lots of very rational reasons to own a home as opposed to renting, but, by and large, they wind up being poor investments.

if you take out a mortgage, the likelihood that you get more out of your home than you paid in is very low.

 
At 12/14/2011 2:55 PM, Blogger Hydra said...

Buying might or might not be better than renting when everything is considered

===============================

A rent / buy analysis is pretty straightforward. The fact that you can rent most places out at a profit suggests the answer. Large, pricey homes are probably the exception, because if it goes empty a few months you take a bath, plus the maintenance is high.

 
At 12/14/2011 3:17 PM, Blogger morganovich said...

"The fact that you can rent most places out at a profit suggests the answer."

on what do you base that?

in most cities, you cannot even come close to covering your mortgage renting it out.

 
At 12/14/2011 3:18 PM, Blogger Ron H. said...

Walt: "How is a house a good investment? If and when you sell after an unknown period of time for maybe more than you paid, you still have to have a place to live, and you have cash outflows all the while you own it. When it comes down to it, we are all renters (just ask someone who "paid off" their house about their continuing property tax and insurance payments)."

All absolutely true, but if there was no advantage to owning, there wouldn't be any rental houses available. Thank goodness people place different values on their living arrangements.

The ongoing cash outflows including maintenance, taxes and insurance, exist whether you own or rent, and the end user ultimately pays them, and if nothing else, ownership provides some amount of hedge against inflation.

 
At 12/14/2011 3:29 PM, Blogger Ron H. said...

Walt: "Buying might or might not be better than renting when everything is considered (a lot of that is emotional). It's best to invest projecting positive returns, and houses that are used for primary shelter just do not do that."

That depends almost entirely on where that house is located. If a person buys in an area likely to fall under the spell of "smart growth" , they can watch housing prices skyrocket.

 
At 12/14/2011 3:49 PM, Blogger Ron H. said...

Morganovich: " in most cities, you cannot even come close to covering your mortgage renting it out."

While this is certainly true in the short term, I believe most people who rent their houses out are counting on inflation over the long term to increase the price of the house, as well as increase rent, so that at some point cash flow becomes positive.

 
At 12/14/2011 4:05 PM, Blogger VangelV said...

While this is certainly true in the short term, I believe most people who rent their houses out are counting on inflation over the long term to increase the price of the house, as well as increase rent, so that at some point cash flow becomes positive.

But inflation also increases the maintenance and replacement costs. And if an individual has a variable rate mortgage the financing costs could go up right along with the inflation rate. While ownership makes sense during some periods (and we may be getting close to such an inflection point) during many periods taking the risk of ownership cannot be justified by the rational investor. Ownership is often great for undisciplined rubes who cannot save any money otherwise but most people could do as well without owning a home.

 
At 12/14/2011 4:33 PM, Blogger Walt G. said...

morgsnovich,

I did not say there are not good reasons to buy instead of rent. I opted to buy myself. When compared to other investment opportunities, buying shelter is not liquid and often does poorly. Real diversification means less than 5% in any investment. Too many people have too much invested and too much faith in a positive return in their primary shelter.

Ron H.

Yes, you can win sometimes, but if you sell your primary shelter, you still have someplace to live. Who wants to move from a desirable place to a less desirable place? Also, the lack of mobility is not quantified into the cost of owning instead of renting.

 
At 12/15/2011 1:47 AM, Blogger Ron H. said...

V: "But inflation also increases the maintenance and replacement costs. And if an individual has a variable rate mortgage the financing costs could go up right along with the inflation rate."

The strategy requires a long term fixed rate mortgage.

"Ownership is often great for undisciplined rubes who cannot save any money otherwise..."

Oops! you caught me. :)

 
At 12/15/2011 2:04 AM, Blogger Ron H. said...

Walt: "Yes, you can win sometimes, but if you sell your primary shelter, you still have someplace to live."

Of course.

"Who wants to move from a desirable place to a less desirable place? "

No one wants to, and no one chooses to. "Desirability" is highly subjective.

Many people move to a smaller or perhaps less expensive home when they are older and don't need as much house as they did when they had kids at home, or they move to a less expensive, but in their view more desirable area when they are no longer tied geographically to jobs. Lots of different reasons for people to do what they do.

"Also, the lack of mobility is not quantified into the cost of owning instead of renting."

The importance of mobility varies widely. While moving is easier for a renter, it's not all that difficult for a homeowner with adequate planning.

 
At 12/15/2011 5:18 AM, Blogger Walt G. said...

"it's not all that difficult for a
homeowner with adequate planning."

And who is willing to accept the current market price for their house even though they think it is worth more.

 
At 12/15/2011 2:12 PM, Blogger juandos said...

"but what does that have to do with freddy and fannie?

that seems like a totally orthogonal issue.

you had argued that the feds were causing price inelasticity
"...

O.K. morganovich what would be happening to housing prices if there wasn't any freddie and fannie?

 
At 12/15/2011 2:47 PM, Blogger Ron H. said...

Walt: "And who is willing to accept the current market price for their house even though they think it is worth more."

Who? Those who currently wish to relocate. My statement was intended to be general, not specific to today's market. Obviously part of their decision to relocate includes acceptance of current prices.

On the other hand, the current price of their new home is most likely lower also.

Loan to value ratios may also play a part in their relocation plan.

 

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