 Affordable
Housing
Mike "Mish" Shedlock
December 31, 2005
Housing is more affordable
now than it was twenty years ago according to the New York Times
article: Twenty
Years Later, Buying a House Is Less of a Bite.
Despite a widespread sense
that real estate has never been more expensive, families in the
vast majority of the country can still buy a house for a smaller
share of their income than they could have a generation ago.
A sharp fall in mortgage rates
since the early 1980's, a decline in mortgage fees and a rise
in incomes have more than made up for rising house prices in
almost every place outside of New York, Washington, Miami and
along the coast in California. These often-overlooked changes
are a major reason that most economists do not expect a broad
drop in prices in 2006, even though many once-booming markets
on the coasts have started weakening.
The long-term decline in housing
costs also helps explain why the homeownership rate remains near
a record of almost 69 percent, up from 65 percent a decade ago.
Nationwide, a family earning
the median income - the exact middle of all incomes - would have
to spend 22 percent of its pretax pay this year on mortgage payments
to buy the median-priced house, according to an analysis by Moody's
Economy.com, a research company.
In high-profile places like
New York and Los Angeles, home to many of the people who study
and write about real estate, families buying their first home
often must spend more than half of their income on mortgage payments,
far more than they once did. But the places that have become
less affordable over the last generation account for only a quarter
of the country's population.
Elsewhere, families tend to
spend far less on housing. In Dallas, the share of income needed
to buy a typical house has fallen to 13 percent this year, from
14 percent in 1995 and 31 percent in 1980. In Tampa, it has dropped
to 21 percent, from 26 percent in 1980. Even in New England,
where the soaring prices of the last decades have frustrated
many young families, house values have still not reached the
heights of the early 1980's, when calculated as a share of income.
"Over 20 years, affordability
has definitely improved because interest rates are much lower,"
said Kenneth T. Rosen, chairman of the Fisher Center for Real
Estate and Urban Economic Research at the University of California,
Berkeley. Houses have also grown bigger during that time, he
said, so people are getting more for their money.
With many suburban houses now
selling for $300,000 and up, young families have a much harder
time buying their first home than they did a few years ago. Still,
housing has been less expensive this year - as a share of local
incomes - than at any point during the 1980's, according to Moody's
Economy.com.
Beyond cost, many families
who simply could not have bought a house 10 or 20 years ago find
themselves able to do so, thanks to changes in the ways banks
lend money. In the past, a home buyer often needed to make a
down payment equal to 20 percent of a house's value to get a
mortgage; today, little or no down payment is common.
The most money that Tim W.
Gilbert has ever had in his possession was $15,000, he said,
in the form of a check for a job he had done as a carpenter.
But he and his wife, Marjorie, were still able to buy a 1936
Cape Cod-style house this year for $176,000 in Poland, about
45 minutes north of Portland.
They took out two mortgages
rather than making a down payment and they use Mr. Gilbert's
$5,000 or so in pretax monthly income to cover $1,600 in mortgage,
tax and insurance payments. Ms. Gilbert, a writer, home schools
their daughters, ages 4 and 6. "I paid rent for 18 or 19
years," Mr. Gilbert, 38, said. "We waited years and
years. We wanted to make this happen."
The Moody's Economy.com calculations
took into account the decline in down payment size in recent
years. But even though these lower down payments mean home buyers
are taking out loans equal to a larger share of a house's price
than in the past, monthly payments have remained reasonable in
much of the country.
The sharp fall in mortgage
rates - from above 10 percent through most of the 1980's to less
than 6 percent in the last few years - is the main reason. Upfront
mortgage fees have also dropped to about a third of a percentage
point of a loan's value, from 2.5 percent 20 years ago. Computers
have made lenders more efficient, and huge pools of global capital
have brought more competition to a business that was once largely
local.
In a nationwide New York Times/CBS
News poll conducted this month, 75 percent of respondents said
they thought most families in their community spent a larger
share of their income on housing now than in the 1980's. Only
5 percent said the share was smaller.
One possible reason for the
perception is that many families have recently taken on mortgage
debt to pay for items other than housing. Some have folded higher
interest loans, like credit card debt, into their mortgage, said
Mark Zandi, chief economist at Moody's Economy.com. Others have
used home equity loans to pay for a new car, tuition or even
a vacation.
This has caused mortgage payments
to rise over the last generation - especially among high-income
families, according to Federal Reserve data - for reasons besides
the cost of housing.
"When you get affordability
stretched so much, all the creative financing in the world can't
stop some correction of house prices," Mr. Rosen, the University
of California economist, said. "It happened in Hong Kong,
Japan and England."
It looks as if it may not happen,
though, in most of the United States.
Try this exercise: Walk into
any car dealership and tell them you can not afford to buy a
new car. They will find a way to make it "affordable"
by stretching out the payments from 3 to 5 to even 7 years if
they have to so that you can make the monthly payment. Does that
really make it affordable?
"People aren't really
shopping prices," said Bill Trask, a broker at Coldwell
Banker Friends and Neighbors Realty in suburban Portland. "They're
shopping payments."
If someone has to take out
an interest only loan, a pay option arm, or do other creative
financing to make it work, then perhaps that person can not really
afford the house. In some locales creative financing accounts
for half of new mortgages. Does that make them affordable?
Also let's not confuse affordability
with value. Ownership costs vs. rental costs are at staggeringly
high ratios in many areas. Can the average person really "afford"
to pay 30-50% too much for a house or condo? That's how overpriced
some areas are on a cost to rent basis. Can you afford to lose
$100,000 on that $400,000 condo if the price drops next year?
Somehow that question is not being asked.
 Another
question to consider that the article neglected to mention is:
Can you afford to buy it and heat it and pay property taxes on
it and maintain it? Even assuming one could afford the mortgage,
those other expenses need to be factored in. What are heating
costs and insurance costs and electrical bills and property taxes
now compared to 1985? Another thing missing is how much money
the median family has left is left over after paying all those
things in addition to medical insurance, food, gasoline, entertainment,
ect.
Let's consider this pearl of
wisdom:
"Beyond cost, many families who simply could not have
bought a house 10 or 20 years ago find themselves able to do
so, thanks to changes in the ways banks lend money. In the past,
a home buyer often needed to make a down payment equal to 20
percent of a house's value to get a mortgage; today, little or
no down payment is common."
The idea presented is that
loose lending standards make something more affordable. Of course
that is preposterous. If someone can not afford to save a down
payment, perhaps they can not really afford to make those housing
payment either. If a renter can not save money for a down payment
with cost of rent at huge discounts to cost to own, how can they
afford to make their home mortgage payments? Teaser rates on
ARMs do not cut it either. When one goes from renting to buying
all kinds of expenses go up. Interest rates can and do fluctuate,
and regardless of what anyone says, real estate prices do not
always go up.
Nationwide, a family earning
the median income - the exact middle of all incomes - would have
to spend 22 percent of its pretax pay this year on mortgage payments
to buy the median-priced house, according to an analysis by Moody's
Economy.com, a research company.
Where is that median priced
home anyway? Take the medium income then perhaps the typical
person can afford the medium home in say Watonga, Oklahoma. Is
that where people want to live?
Consider this justification
for affordability offered in the article:
One possible reason for the perception is that many families
have recently taken on mortgage debt to pay for items other than
housing. Some have folded higher interest loans, like credit
card debt, into their mortgage, said Mark Zandi, chief economist
at Moody's Economy.com. Others have used home equity loans to
pay for a new car, tuition or even a vacation.
Let's see... The median person
did not have the money to pay off their credit cards, their car,
their tuition, or their vacation, but somehow it is all "affordable"
if they roll all that short-term debt up into their long-term
house payment.
Savings rates are now negative
on average, negative 1.6% or so for several months running. That
is on average. Many people are obviously saving. For the average
to be negative is staggering. What gives? What gives is that
debt across the board is sky high and people are having a damn
hard time servicing it. OK, so the house is affordable, but no
one can afford to heat it or eat or send their kid to the doctor.
Decisions decisions. No problem, just do a cash out refi from
now until forever because home prices always go up.
Things to consider when discussing
affordability:
- The negative savings rate
.
- falling real wages
.
- credit card debt
.
- bankruptcies
.
- delinquencies
.
- medical expenses
.
- refis to support consumption
.
- rising consumer debt
If the biggest expense that
most people have (housing) is so damn affordable why is consumer
debt going through the roof? I guess it's a good thing that housing
is affordable because it sure seems no one can afford to pay
for anything else.
In stark contrast to the NY
Times article above, check out the WSJ article Housing
Affordability Hits 14-Year Low.
Housing affordability in October
sank to its lowest levels since 1991, according to the National
Association of Realtors' Affordability Index, a widely followed
measure of the average household's ability to buy a home at current
interest rates. In some areas, including New York City, Los Angeles,
San Diego, San Francisco and Miami, housing affordability has
dropped to levels not seen since the early to mid-1980s, according
to mortgage giant Fannie Mae.
Affordability has long been
a problem for low-income home buyers. But as home prices have
marched steadily higher in recent years, many buyers with healthier
incomes also are being squeezed. Declining affordability mainly
affects whether first-time home buyers will enter the market,
but in some markets people who already own a home are finding
it tough to trade up.
There are signs that the growing
costs of homeownership are also beginning to take a toll on the
housing market. "There's a systematic erosion of affordability,"
says David Seiders, chief economist of the National Association
of Home Builders. That decline is "the main reason ... the
market is starting to cool." Mortgage applications fell
to an 11-month low last week, the Mortgage Bankers Association
reported yesterday, as applications to purchase homes declined.
Housing affordability fell
nearly 9% in the third-quarter from the same period a year earlier,
according to an analysis prepared for The Wall Street Journal
by Moody's Economy.com, a unit of Moody's Corp., which adjusted
the NAR Affordability Index for seasonal variations. Affordability
dropped by more than 20% in nearly two-dozen markets, including
Phoenix and Tucson, Ariz., Spokane, Wash., and Orlando and Lakeland,
Fla., according to the study. "You have to go back 25 years
to find a decline that is as significant on a percentage basis,"
says Mark Zandi, chief economist of Moody's Economy.com.
In Tucson, where affordability
has fallen 23% over the past year, buyers in all price ranges
are feeling the pinch, says Kevin Freadhoff, an agent with Long
Realty Co. Mr. Freadhoff says he's currently working with eight
couples who would like to buy their first home but have been
priced out of the market and a dozen others who already own a
home, but are having trouble trading up.
In Seattle, declining affordability
is forcing many home buyers to accept longer commutes, says Jane
Powers, a broker with Ewing & Clark Inc. It's also fueling
price increases in outlying areas such as Bremerton, where affordability
has fallen nearly 22% in the past year. And in Bergen County,
N.J., where most starter homes are priced above $400,000, "prices
have gone up to a point where it's pushing the first-time home
buyer out of the market," says Margaret Foudy, manager of
the Weichert Realtors office in Tenafly. That creates a "domino
effect" as people who already own a home find it tougher
to move up, says Ms. Foudy.
In 57 of 379 metro areas nationwide,
homes were so expensive in the third quarter that a family earning
the median income couldn't afford the median-priced home based
on traditional lending standards, according to Moody's Economy.com.
Sixteen markets have joined the ranks of unaffordable areas over
the past year, according to the analysis.
Another major analysis of affordability,
by the National Association of Home Builders and Wells Fargo,
shows that just above 43% of all new and existing homes sold
in the third-quarter were affordable to families earning the
median income. That's the lowest level since the index was first
released in 1992 and compares with 50.4% a year ago.
Some factors have helped offset
the decline in affordability. Many borrowers have embraced creative
mortgage products, such as interest-only loans, mortgages with
teaser rates of as low as 1% and "piggyback" loans
aimed at buyers who don't have the money for a down payment.
In the third quarter, borrowers could boost their purchasing
power by 26% by taking out an interest-only mortgage, which allows
a home buyer to put off repaying principal for several years,
instead of a standard mortgage, according to Moody's Economy.com.
In Tucson, roughly 60% of first-time
home buyers make no down payment and instead now use 100% financing
to get into the market, up from 30% two years ago, says Renee
Booker, president of Long Mortgage, the mortgage arm of Long
Realty.
In Spokane, where affordability
fell more than 28% over the past year, many first-time home buyers
are using piggyback loans and 40-year mortgages, which have smaller
monthly payments than traditional 30-year mortgages, to get into
the market, says Laraine Hunter, a managing broker with John
L. Scott Real Estate. "We're getting creative with helping
people get into homes," she says.
And renting remains a bargain
in many parts of the country. Stephan Vrudny, an engineer who
lives in San Diego, sold his three-bedroom condo to an investor
in June for $405,000, then rented it back for $1,500 a month.
Mr. Vrudny figures the arrangement is saving him $430 a month,
even after taking into account the lost mortgage-interest deduction.
"We'll be homeowners again when it makes sense again as
an investment," says Mr. Vrudny, who had purchased the unit
for $345,000 last year.
The bottom line is real wages
are declining, bankruptcies are skyrocketing, consumer debt is
soaring, and equity extraction from homes is used for routine
consumption. This is happening in a "recovery". Something
does not add up. In fact many things do not add up. Topping off
the list is the idea that housing is now affordable. "There's
a systematic erosion of affordability," says David Seiders,
chief economist of the National Association of Home Builders.
That decline is "the main reason ... the market is starting
to cool." The amazing thing there is not what is being
said but who is saying it.
Also note that comparing affordability
now to the very peak of the interest rate cycle when interest
rates were 18% is like calling the Naz at 4000 on the way down
a "bargain" because it was 5000 a few months earlier.
Just because something was supposedly siller at some other point
in time does not mean the current conditions are affordable.
Here is another viewpoint on
affordability:
Latest
analysis of 299 markets: See how your hometown ranks.
In aggregate, do those markets
look affordable?
By the way. I just happen to
have a chart laying around. It is a bit outdated but given what
has happened in the last couple of years one might be
able to project what it looks like now.
Gee, now what do you think
that looks like now? Four standard deviations above the norm?
Five? Notice who put that chart out. If anything one would expect
bias to run the other way. What do you think is more accurate?
That chart or the NY Times article?
Let's now take a look if there
can be any possible distortions in relation to median income.
Consider this obviously made up example:
Assume there is a subdivision
with one hundred houses.
Assume everyone paid $250,000 for them.
Assume that 2 households in that subdivision make $80,000.
Assume 48 households make something in excess of $80,000.
Assume the remaining 48 households make close to $20,000.
The median income is $80,000
but 48% of the people in the subdivision have way more than stretched
their housing budget to buy that $250,000 home with no money
down have they not?
Medians and averages can play
tricks. Yes that is a made up example. But is it not possible?
Considering that close to 70% of the population owns their own
home and given that pay raises have not exactly be equitable
or evenly distributed over these past few years, one can only
wonder what percentage of people in the median priced home that
really can afford to pay that median price. I believe the negative
savings rate and rising consumer debt levels answer the question.
One final point: Sub-prime
mortgages account for 13.4 percent of all mortgage debt outstanding
according to the Mortgage Bankers Association. That is up from
2.1 percent in 1999. Is that a sign of affordability or is that
a sign of speculation by lenders as well as marginal buyers all
hoping without reason for prices to forever keep going up?
A couple of things have to
give, and they will. They are as follows:
1. The discrepancy between
rental costs and ownership costs
2. The standard deviations above norm on affordabilities
Not only will those gaps close,
the bulk of it, if indeed not all of it, will close by home prices
falling as opposed to rising wages. Global wage arbitrage guarantees
it. The bubble areas, California, Florida, Massachusetts, Phoenix,
Chicago, New York, Minneapolis, and many high population areas
will be especially hard hit. The idea that the rest of the country
will be spared is laughable. 40-50% of the jobs in this recovery
were directly related to real estate. Many of those jobs will
vanish in the upcoming consumer led recession and many people
will lose their homes over it as well. Just as the downward spiral begins
we see silly articles telling us how affordable things are. I find it all rather amazing.
Mike Shedlock "Mish"
email: Mish
321gold Inc
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