Tuesday, June 02, 2009

Historically High Housing Affordability, Low Mortgage Rates Boost Pending Real Estate Sales

WASHINGTON (MarketWatch) -- Pending sales of existing homes rose for the third month in a row in April, boosted by record-low mortgage rates and special incentives for first-time buyers, a real estate trade group reported Tuesday. The pending home sales index for April rose 6.7% after a 3.2% increase in March, the National Association of Realtors said. The index, based on sales contracts on existing homes, was 3.2% above April 2008.

With mortgage rates hovering near all-time lows, housing affordability has improved, said Lawrence Yun, chief economist for the NAR. Yun expects existing-home sales to rise about 17% by the end of the year to a seasonally adjusted annual rate of 5.48 million.

separate report on housing affordability recently released by the National Association of Realtors indicates that housing affordability remains at near-record levels (see chart above). In April, the Housing Affordability Index (HAI) increased to 174.8, up almost three full points from 171.9 in March, largely because of historically low mortgage rates of 4.96% (April average) and stable home prices and income levels. Except for the 176.9 index reading in January, April's affordability measure of 174.8 was at an all-time, historic record high.

An HAI of 174.8 would mean that the typical household earning the median family annual income of $60,927 in April would have 174.8% of the standard qualifying income level of $38,848 required to purchase a median-priced existing single-family house ($169,800) with a 20% down payment, financing the remaining 80% of the sales price with a 30-year fixed rate mortgage at the April average of 4.96% (monthly payment of $726 for principal and interest).


At 6/02/2009 5:14 PM, Blogger Unknown said...


"The index as presently constructed is utterly worthless. It provides little or no insight into how affordable US Housing actually is. Further, what is omitted from the index is especially relevant to the problems occurring in the housing market today. The Index fails to account for — or even recognize — any of the out of the ordinary circumstances that are currently bedeviling the Hosuing market.


As hard as this might be to imagine, it shows that over the course of the biggest run up in housing prices in American history, the Index remained perfectly affordable. Except for one monthly reading of 99.55 in late 2005 — a smidge below 100 — housing never dipped into the level of unaffordable over the entire giant housing boom.

This is mind bogglingly astonishing. If the affordability index failed to show housing was unaffordable during 2005-06, when would it ever show that?"

At 6/02/2009 5:44 PM, Blogger gusto said...

I wonder how the run up in unemployment impacts this "affordability" index.

At 6/02/2009 6:05 PM, Blogger Liberty's Lawyer said...

Buy now. Higher interest and inflation rates are coming with all the spending going on. I'm just hoping it holds off until I'm done with school.

At 6/02/2009 7:28 PM, Anonymous Anonymous said...

Again, your index assumes buying a home valued at nearly 4.5X GROSS income, or 300% better leverage than the prior generation enjoyed 30 years ago. None of these affordability indexes accurately reflect growth of leverage, which is clearly a factor that changes. --Best wishes from Kansas! –Redbud

At 6/03/2009 12:15 AM, Blogger Hot Sam said...

Who, among those who do not already own a house, can afford the 20% down payment which is assumed in the HAI?

At 6/03/2009 12:38 AM, Anonymous Anonymous said...

Three groups of people immediately come to mind:

1. People who are responsible, who save a portion of their income via the age-old practice of spending less than they earn

2. People who don't overpay for a home, sell it for a profit and have the equity available for a 20% (or more) downpayment on their next home.

(Yours truly falls into both of the above camps, thank you very much.)

3. People who come into money via inheritance, lottery, etc.

(Unfortunately, yours truly does NOT fall into the above camp.)

At 6/03/2009 12:40 PM, Blogger Hot Sam said...

Three groups of people immediately come to mind

1. The savings rates of Americans have historically been dismally low. They have recently shot up because of the precautionary motive but not enough to amass a 20% down payment. Many people who did possess assets for a potential 20% down-payment lost most of it in the stock market.

2. I specifically said "who do not already own a house". The point of interest here is not people who "change" houses, but people who are going from renting to owning.

3. In what has come to be known as the "Sandwich Generation" where adults support both their children AND their parents, what percentage of the population receives an inheritance? How many inheritors share those inheritances? Oh, and then there's that nasty death tax.

Any housing statistics coming from the National Association of People Who Make Money on Both the Buy Side and Sell Side of Houses are generally worthless. Anyone of reasonable intellect should immediately identify the conflict of interest. The direction of their bias is always toward buyers buying and sellers selling, regardless of market or economic conditions.

The popularity of the affordable mortgage products of 2005-2007 and the current popularity of FHA loans demonstrates an inherent unwillingness and inability to save 20% for a down-payment.

I second the motion that the Housing Affordability Index is worthless. It is irrelevant and uninformative because every quarter since Q3 1983 it has been above 100. The data shown in the graph is wrong. I have the data right here and even at the house price peak, the affordability index never fell below 123.4. If the HAI dips only to 123.4 during the largest house price bubble in history, then it's complete balloon juice.

It is misleading because it ignores many other barriers to entry such as personal savings, tax rates, and credit scores. It completely ignores home quality.

The high and rising foreclosure rates are proof of the pudding that housing was not at all affordable for the past four years.

Yours truly has a six-figure income, a high FICO score, high savings, and low debt, and I cannot afford to buy any house worth living in after taxes, fees, escrow, closing costs and insurance have taken their bite. I even qualify for a 0% down VA loan!

At 6/03/2009 4:58 PM, Blogger misterjosh said...

With the coming inflation and concomitant increase in interest rates, I'm never going to be able to sell my house in 5 years!


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