Sunday, May 20, 2012

Historically High Housing Affordability Will Play A Major Role in the Housing Rebound This Year

The chart above shows one 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 $234,500 median-price new home purchased in March with a 20% down payment and a 3.95% fixed-rate 30-year mortgage would be $890.23.  Average monthly mortgage payments have been below $900 for the last eight months going back to last August, and the March payment is about 33% below the average of $1,334 per month over the last 33 years.  

The incredible housing affordability today seems to be an under-reported and under-appreciated story, although that is probably a major factor in the home sales rebound in recent months, especially in April as I have been predicting.  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.  During the decade of the 1980s, average monthly mortgage payments according to this measure were $1,627 (in 2012 dollars), almost double the average payment today of $890.  On an annual basis, the increased housing affordability today translates into more than $9,000 in savings compared to the 1980s, which is the same as a $9,000 average increase in household income.  In the 1990s, the average monthly home payment was $1,224, and that would translate into annual savings today of $4,000 at the $890 monthly payment in March.  

Bottom Line: The incredible affordability of housing today, with low interest rates and flat home prices, will be a major factor in the housing sector's rebound this year.  In many markets, it's becoming cheaper to buy than rent, and we can expect increased home sales in 2012 as homebuyers take advantage of the greatest period of housing affordability in a generation.    

Update: The assumption of a 20% down payment is NOT critical to the analysis, and neither is the assumption of a median priced home.  The chart below shows the original payments from above (blue line), plus the monthly payments on a house priced at 50% of the median priced home, assuming a 5% down payment (red line).  The downward trend for the second set of assumptions follows the exact pattern of the original assumptions. The size of the down payment doesn't affect the analysis, and neither does the assumption about whether the homes are median-priced, or some fraction above or below the median price. 



26 Comments:

At 5/20/2012 10:14 AM, Blogger M_maven said...

Great point and chart! If news outlets were smart they'd sign you on asap:).

 
At 5/20/2012 12:45 PM, Blogger VangelV said...

Payments today for a $234,500 median-price new home purchased in March with a 20% down payment and a 3.95% fixed-rate 30-year mortgage would be $890.23.

But most people already own their own homes and many homes are already underwater as mortgages are larger than the market price of the home. With the way that conditions are the number of people who can put down 20% to buy their own homes is relatively small. And with shadow inventories being what they are the next step for a recovery requires quantitative easing. While that would push up nominal prices it would make it very difficult to create an environment where real price increases were sustainable.

In many markets, it's becoming cheaper to buy than rent, and we can expect increased home sales in 2012 as homebuyers take advantage of the greatest period of housing affordability in a generation.

This is true but if you can't put down the 20% or want mobility because of job uncertainty renting still makes sense to some people.

 
At 5/20/2012 1:18 PM, Blogger bart said...

Mortgage vs. rent, 1982 on:

http://www.nowandfutures.com/images/case_shiller_pay_v_rent1970on.png

 
At 5/20/2012 1:20 PM, Blogger bart said...

Mortgage payments, 1964 to present.

Raw dollars, CPI adjusted and CPI w/o lies adjusted - base year 2000.

http://www.nowandfutures.com/images/mortgage_housing_cpi_lies.png

 
At 5/20/2012 2:06 PM, Blogger Pulverized Concepts said...

But most people already own their own homes

Then why would they need to buy another home? There doesn't seem to be a recognition that there is always a pool of houses for sale made up of those belonging to seniors that have moved into assisted living or actually died, people that have moved to other parts of the country for employment reasons and houses that no longer satisfy the requirements of the owners. The foreclosure episode and bursting of the bubble added to that pool and lowered the price of all of them.

Simultaneously, the increase in gas prices has made houses in outlying areas less desirable. The cost of a daily commute has become more of a factor in the total housing budget.

The potential buyers are newlyweds, as usual, people that have moved for emplyment reasons, as above, and those with secure enough income to make an investment in something that they feel is at the bottom of the market, in other words government employees.

 
At 5/20/2012 2:24 PM, Blogger VangelV said...

Then why would they need to buy another home? There doesn't seem to be a recognition that there is always a pool of houses for sale made up of those belonging to seniors that have moved into assisted living or actually died, people that have moved to other parts of the country for employment reasons and houses that no longer satisfy the requirements of the owners. The foreclosure episode and bursting of the bubble added to that pool and lowered the price of all of them.

There is a recognition that there is always a pool of houses for sale. The problem for some is that they do not have enough equity to be able to put down 20% on another home. In fact, many people are wiped out because they owe more than what their houses are worth. That is not a recipe for a sustainable recovery until after the market is allowed to liquidate the bad investments made during the bubble.

Simultaneously, the increase in gas prices has made houses in outlying areas less desirable. The cost of a daily commute has become more of a factor in the total housing budget.

I agree. But that is a big problem for those in the suburbs. They are trapped with falling home prices and increasing costs. It is tough to find enough to be able to put down the 20% on a home closer to work. Actually, for some that is impossible because the two breadwinners may work very far apart.

The potential buyers are newlyweds, as usual, people that have moved for emplyment reasons, as above, and those with secure enough income to make an investment in something that they feel is at the bottom of the market, in other words government employees.

Yes, when young people get older they will look to buy homes. The trouble is that many jumped the gun during the bubble and bought homes without thinking. Many of them are not looking for a home but looking to move back in with mom and dad.

 
At 5/20/2012 4:01 PM, Blogger rjs said...

the new household formations that would make your prediction a reality aint happening cause the kids are all up to their eyeballs in debt already...

 
At 5/20/2012 4:27 PM, Blogger Mark J. Perry said...

I was only using a 20% down payment on a median price home as assumptions to generate monthly payments. I could assume a 5% down payment on a house that is 50% of the median price home and the trend in the chart would be exactly the same.

 
At 5/20/2012 4:35 PM, Blogger Mirco Romanato said...

The payments are down because the prices are down; and the prices are down because people can not pay more.
Your analysis would be right if the lower prices would be caused by lower building costs.
As is now, the prices are low and will stay low because the young buyers must pay back (if they are able to do so) their student's loans fist. Then they will be able (I don't know if they will be willing) to save enough for a 20% to buy a home. In the meantime they could like to have children (or not).

 
At 5/20/2012 4:48 PM, Blogger Mark J. Perry said...

See updated chart in the post assuming only a 5% down payment, and a purchase equal to 50% of the median priced home. Changing those assumptions does NOT change the downward trend of monthly payments. I can use a 0% down payment assumption (e.g. VA loans) and the line would shift down, but the trend wouldn't change.

 
At 5/20/2012 4:57 PM, Blogger bart said...

My work (as shown in http://www.nowandfutures.com/images/mortgage_housing_cpi_lies.png ) very much confirms Dr. Perry's work, in spite of his base year being 2012 and mine being 2000.

The blue line is the straight CPI adjusted mortgage payment, and the most recent value is a record low going all the way back to the last 1960s. It would change a little if I went to no down payment, but the overall trends would be substantially the same.

 
At 5/20/2012 6:28 PM, Blogger morganovich said...

mark-

but that point is that you can no longer make a 5% downpayment.

banks are demanding 20%+.

average equity in a us home has dropped from 45% TO 7%.

that is the key issue in terms of affordability.

if you cannot make the downpayemnt, rates do not matter at all, it's just a great drink special in a VIP room you cannot get into.

in terms of the relation to the amount of equity in existing homes to the amount of downpayment required, the us housing market has never been less affordable.

i think you are looking at the wrong metric here as the gating/driving factor for US home purchases.

if this were, in fact, the factor determining behavior, then we would have to conclude that home prices have essentially no price elasticity of demand at all. a 30-40% drop in price has not upped sales more than a tiny bit of a massively depressed base and remain more that 30% off the 2005 peak.

as such a low elasticity seems highly unlikely, that would seem to imply that there is some other factor not being factored into price, which, in this case, is how badly depreciated the acquisition currency is and the large gap between home equity and the 20% required to buy or refi.

i think you are looking at the wrong key metric here.

housing is stabilizing and recovering a little as the % of distressed sales finally winds down, but for the market to really free up again, a lot of cash in is going to have to come from somewhere. a 13% gap is no joke unless you plan to trade down and a big, big issue if you are trying to trade up.

 
At 5/20/2012 6:52 PM, Blogger Mark J. Perry said...

Yes, it's still easy to make a 5% down payment or less.

FHA is still a major share of mortgage originations in many cities: 28.8% in Portland, 24.3% in Seattle, and 35.4% in Miami, all in recent months. Those are all 3-5% down payments. Then add in more VA mortgages, which are zero down, and you've still got a major share of mortgages with 0-5% down payments.

 
At 5/20/2012 7:05 PM, Blogger Mark J. Perry said...

FHA mortgages were 30% of the sales in Southern California in April.

 
At 5/20/2012 8:10 PM, Blogger Pulverized Concepts said...

. In fact, many people are wiped out because they owe more than what their houses are worth.

That's an interesting concept, but what does it mean? How, exactly are they "wiped out"? When they bought those houses they could evidently afford to make the payments. Now, when the building is "underwater" they should still be able to make the payments, ceteris paribus, and they do need a place to live. If they give up on the mortgage, they will still need to pay rent. Who is to say that the property that is underwater now will remain that way for an extended period of time? And how about automobiles? They depreciate dramatically as soon as they leave the dealership. Financed for five years and more now, there are many cars that are not worth the loan outstanding on them but people don't leave them in the parking lot of the saloon and go rent another at the airport.

A percentage of those that bought at the top of the mania either did so for the wrong reasons or watched too many television reports on the real estate crash. Someday they might wish that they'd hung in for awhile.

 
At 5/20/2012 9:03 PM, Blogger VangelV said...

That's an interesting concept, but what does it mean? How, exactly are they "wiped out"? When they bought those houses they could evidently afford to make the payments. Now, when the building is "underwater" they should still be able to make the payments, ceteris paribus, and they do need a place to live. If they give up on the mortgage, they will still need to pay rent. Who is to say that the property that is underwater now will remain that way for an extended period of time? And how about automobiles? They depreciate dramatically as soon as they leave the dealership. Financed for five years and more now, there are many cars that are not worth the loan outstanding on them but people don't leave them in the parking lot of the saloon and go rent another at the airport.

You buy a $500,000 house for $100,000 down. You now have $375,000 left on a mortgage but your home is worth $295,000. This means that you lost your $100K deposit and still owe $80K more than the house is worth. That is a wipeout.

Now you could make it up by staying for a long time and letting inflation bail you out. But that will not be easy because you will have to limit your job opportunities and will have to use around $25-35K per year on mortgage payments, repairs, maintenance, utilities, and taxes.

 
At 5/21/2012 1:07 AM, Blogger PeakTrader said...

Houses built in the U.S. homebuilding boom, from 1995-06, don't require much maintenance or repairs (unless they were abandoned).

Also, people buy houses based on monthly payments, not price, unless it's an investment, and they won't pay more than they're worth (in real value, not nominal value) relative to renting.

I know several people who bought new or almost new houses and regardless of the substantial declines in price, the monthly payments are the same, while their incomes increased (unless they're unemployed) and they're still very nice houses.

 
At 5/21/2012 10:17 AM, Blogger VangelV said...

FuHouses built in the U.S. homebuilding boom, from 1995-06, don't require much maintenance or repairs (unless they were abandoned).

Sure they do. Nails pop out and have to be reseated. Houses need painting. Furnaces need repairs. Kitchen cabinets need readjustment. Some appliances need replacement. Driveways need to be repaired and new surface treatments. In many cases ice daming and valley erosion cause roofs to leak. A good rule of hand is that a house costs you 10% of its value for insurance, maintenance, taxes, utilities, and financing costs per year.

Also, people buy houses based on monthly payments, not price, unless it's an investment, and they won't pay more than they're worth (in real value, not nominal value) relative to renting.

That is the problem. They look at the payments and forget the massive commitment that is implied in the closing price. That leaves them vulnerable to market and labour market volatility.

I know several people who bought new or almost new houses and regardless of the substantial declines in price, the monthly payments are the same, while their incomes increased (unless they're unemployed) and they're still very nice houses.

But that is not the point. Those people are trapped because they would have to take a huge capital loss if they move to places where job opportunities are better. Reduced mobility means reduced opportunities for many families.

 
At 5/21/2012 10:18 AM, Blogger VangelV said...

I can't afford a home and I am solidly middle class.

Well, let me rephrase, I can't afford a "middle class" home. Rather, I rent an apartment in a solidly middle class neighborhood in a solidly middle class city-town.


A poor person can rent an apartment in a solidly middle class neighborhood in a solidly middle class city-town. It does not make him middle class.

 
At 5/21/2012 10:51 AM, Blogger morganovich said...

mark-

that's an interesting point about the fha. it probably explains a lot of the housing rebound.

it's also the next impending disaster.

FHA loans have 3X the default rate if even the bad vintages of the gse loans at the same maturity.

http://www.doctorhousingbubble.com/fha-insured-loans-low-down-payment-fha-bailout-2012-fha-low-down-payment-risk/

maybe it's just me, but more bad federal lending seem like the last thing the housing market needs.

fha loans are astoundingly dangerous lending. very low down, very low rates, and aimed specifically at those with no credit history to speak of.
and affirmative action.

far from having learned from the CRA/GSE debacle, this looks like an even riskier version of the same play.

ugh.

 
At 5/21/2012 11:28 AM, Blogger Pulverized Concepts said...

Now you could make it up by staying for a long time and letting inflation bail you out.

Wait a minute, people told me in 2002 that houses were becoming more valuable, is that the same as inflation? Is the rise in price of one particular thing, like a house, necessarily indicative of inflation? Last week a dozen eggs were $1.45, now they're $1.10, are we going through deflation? Or was there an "egg bubble"?

 
At 5/21/2012 12:01 PM, Blogger morganovich said...

pc-

was that an attempt at humor or do you really not understand the concept of inflation?

 
At 5/21/2012 6:33 PM, Blogger VangelV said...

Wait a minute, people told me in 2002 that houses were becoming more valuable, is that the same as inflation? Is the rise in price of one particular thing, like a house, necessarily indicative of inflation? Last week a dozen eggs were $1.45, now they're $1.10, are we going through deflation? Or was there an "egg bubble"?

First, where are you getting your wholesale egg price data from? The charts that I have looked at show nothing unusual. Eggs normally tend to peak in price around January and hit a low around July.

Second, price action in any one sector is not an indication of inflation or deflation. But if you have bought a house that you paid way too much for and are now under water it is a given that over time the falling value of the USD will make your outstanding mortgage worth far less than the house itself. My uncle paid for adding a second story to his home by using the C$200 I sent him. The loan value had fallen by such a huge amount that a mere $200 would settle it.

 
At 5/21/2012 6:34 PM, Blogger VangelV said...

pc-

was that an attempt at humor or do you really not understand the concept of inflation?


I had trouble with figuring that out so I assumed that he was serious.

 
At 5/21/2012 8:53 PM, Blogger PeakTrader said...

VangelV, based on your statements, you seem to believe homebuyers are dumb, e.g. "They look at the payments and forget the massive commitment" or "Those people are trapped because they would have to take a huge capital loss if they move to places where job opportunities are better."

I think, homebuyers understand when they buy a house they're restricted in a geographic area, and I suspect over 90% of renters look for jobs only in their geographic regions too.

 
At 5/22/2012 9:53 AM, Blogger VangelV said...

VangelV, based on your statements, you seem to believe homebuyers are dumb, e.g. "They look at the payments and forget the massive commitment" or "Those people are trapped because they would have to take a huge capital loss if they move to places where job opportunities are better."

Not exactly. I bought a home knowing that housing would underperfom but did it to keep my wife happy. The agreement was that we would stay put for as long as my wife wished. The rule was that the equity and the home plus 10% of our after tax net worth would be the only amount of money she could use to buy the next home all in.

My house has gone up by around 65% or so from the purchase price seven years ago. While that is a serious underperformance when compared to oil, gold, and silver, my preferred investments over that time frame, the lost opportunities are worth the peace and harmony that they purchased.

But let me note that I purchased a home in a market that did not explode as most homeowners in the US did. While I consider it overvalued at the time the Canadian banks were more prudent and Canadian laws bound homeowners to their promises. I do not believe that I would have bought a home in the US anywhere near the peak.

My back of the envelope calculations are simple. Under normal market conditions when the interest rates are not being significantly manipulated a home is worth 100 times the market monthly rent. And the total annual cost of the home is around 10% of the market price. This includes the reserve fund contributions that you need to make to pay for future major repairs, taxes, utilities, and financing costs.

In a manipulated market I adjust for the artificially low or high financing costs.

I think, homebuyers understand when they buy a house they're restricted in a geographic area, and I suspect over 90% of renters look for jobs only in their geographic regions too.

I do not think this is true. US workers used to be the most mobile because liquidity in the real estate markets allowed them to take better opportunities in other cities. That is not as easy at this time.

 

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