Thursday, March 15, 2012

Housing Affordability Reaches Record High in Jan.

The National Association of Realtors' Housing Affordability Index exceeded 200 in January for the first time ever and reached a new record high of 206.1, meaning that the typical American household has more than double the income needed to qualify for the purchase of a median-priced home.  Based on the hypothetical purchase of the median-priced home of $154,400 in January, financed at the average mortgage rate of 4.37% (with a 20% down payment), the median family income of $60,944 was 206.1% of the $29,568 income required to qualify for the financing and the $616 monthly payments (principal and interest).   

Housing has never been more affordable in U.S. history than it is today, which should translate into robust home sales and an improving real estate market this spring and summer.   


At 3/15/2012 9:15 AM, Blogger morganovich said...

and yet transaction volume remains quite low.

unless price elasticity of demand for housing is very low (of which there is no evidence that i am aware) then something else must be going on.

i submit that it is likely 2 factors that are working together.

1. the size of down payments required has gone up a great deal as have the credit scores required to get a loan. this makes housing a great deal MORE expensive as coming up with a 20% downpayment after several years of recession is far from easy for most. this is further exacerbated by high fico requirements that basically make this a fantastic drink special in the VIP room.

2. unless you are a first time buyer, you tend to fund the downpayment (or even the whole of) your new home purchase with the equity in your last one. that equity has been greatly reduced. 1/4 of mortgages are upside down and somehting like 1/2 of mortgaged homes have under 5% equity.

you have to think of home prices like a currency. that currency has devalued sharply and there was a great deal of leveraged exposure to it. sure, if you sold your house in 2006 and bought gold, you are sitting pretty, but few did.

most have seen their buying power erode sharply as their home equity disappeared and thus are not benefiting from this "affordability". it's a bit like saying "stocks are cheap now". that may have been true in march of 2009, but not if you were fully invested the whole way down. in real terms, you could buy just what you could in 2007 because you lost 40% of your nominal buying power.

meanwhile, rents are soaring and the % of americans renting is way up as well.

this seems an odd trend to see so intensely if home purchase is really so "affordable". one would expect the arbitrage to go the other way.

i think the fact that it isn't is a sign that this measure of "affordable" is incomplete.

At 3/15/2012 9:28 AM, Blogger Mark J. Perry said...

Reported transaction volumes (unit sales) were increasing in January and February in many markets to 4 or 5 year highs for those months: Portland, Las Vegas, Phoenix, Seattle and Southern California.

At 3/15/2012 9:29 AM, Blogger Jon Murphy said...

I agree with you, Morganovich.

Prices are low but barriers are high.

I'm also wondering if there isn't a cultural things going on: people (especially with the younger generation) saw home values plummet and they are questioning the value of the home.

Additionally, people may still be concerned about buying a home based on the tepid recovery. They are worried about their job and are hesitant to settle down. One of the major advantages of renting is the mobility.

We should also remember there are still many foreclosed properties on the market, depressing values.

Interest rates are being held artificially low, too.

All that being said, I do agree, Dr. Perry, that we'll see growth in Housing. I'm just not sure it'll be robust.

At 3/15/2012 9:47 AM, Blogger morganovich said...


they are also still WAY down from pre recession peaks.

transaction volume was 7 million units a year in 2005.

in 2009 they were 4.34

they bottomed in 2010 at 4.19.

on a seasonally adjusted basis, this jan was 4.57 up the barest thread from feb 2010 which was 4.54 despite that fact that this was the mildest january in a generation vs last year's deep cold and heavy snow.

(source NAR)

so sales volume this jan was up 0.7% vs a year ago while the "affordability" index jumped from 188.6 last year to 201.5 this year, a 6.8% rise.

if affordability is up a full order of magnitude more than transaction volume year over year, then i think my point stands.

either price elasticity of demand for housing is amazingly low (and again, i am not aware of any evidence that this is the case) or this affordability index is incomplete and not taking into account other forms of cost like downpayment and a depreciated currency.

also worth noting:

my stock market example is actually much too optimistic as a comparitor for home prices.

most own a home at a level of leverage that they would never buy stocks.

if you had a 10% down-payment on a home and price dropped by 5%, that's a 50% loss of equity. a 15% drop is a 150% loss of equity.

that's why houses are not really affordable. few can make down payments even if they can qualify for a loan.

the current wisdom in the realtor market is do not even waste your time on a buyer who is not pre approved because the deal will break on financing.

i absolutely agree that cash is king and that if you can pay it or have the kind of credit to get 2% loans, it's a great time to buy. however, it's not an option available to most.

At 3/15/2012 9:49 AM, Blogger morganovich said...

sorry, that should read "up from jan 2011". the number is correct, i just got the month wrong.

At 3/15/2012 9:57 AM, Blogger morganovich said...


i doubt it is cultural so much as economic. 25 year olds are not buying houses at the moment. they simply do not have the money, except in the bay area where a new tech IPO cycle is driving an uptick in sales and prices. facebook coming public will drive the SF real estate market (which is already at highs and has very little supply) wild.

what may be at play is just a simple market dynamic.

at the lows of a stock market swing, no one will buy. it's what makes lows overshoot. when the whole market is convinced not to buy because the tape will be lower tomorrow, that is when you get a low, but it can take a long time.

then, once price move up a little, everyone gets fearful of "missing the train" and jump in aggressively.

of course, this presupposed that there is money available to put to work, and i have doubts that is the case just now in housing.

At 3/15/2012 11:04 AM, Blogger Buddy R Pacifico said...

Yes, house prices are very affordable -- if one(or two) is approved for a house deal.

From the National Association of Realtors:

"Forty-seven percent of NAR members report that contracts settled on time in January; 21 percent had delays and 33 percent experienced contract failures. Contract cancellations are unchanged from December but were only 9 percent in January 2011; they are caused largely by declined mortgage applications and failures in loan underwriting from appraisals coming in below the negotiated price."

So, there is increased demand for houses, but much higher rejection for house deals by lenders.

I'm glad to see actual transactions increasing in some markets -- cash is doing the talking.

At 3/15/2012 12:38 PM, Blogger Ron H. said...

Jon M: "We should also remember there are still many foreclosed properties on the market, depressing values."

Yes - foreclosures also depress "prices", as foreclosure sales, usually at low prices, are considered in the comp price estimate for the house you wish to sell. Many potential sellers may "value" their homes at more than the low comp, and not consider selling, especially if they now have little or no equity to take with them.

At 3/15/2012 4:38 PM, Blogger Redbud said...

Why is 5X income an appropriate risk on a home? It was 1.5X income not that long ago. Be sure to highlight this reality. The higher the leverage, the bigger the risk. The leverage has NOT drained out HERE yet. --Best Wishes from Kansas. Redbud


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