Housing Bottom Pickers Cite Affordability, But Do They Really Know What It Means?

Affordability has recently been used as one of the strongest argument for a bullish housing outlook.  In my opinion, it is just the reverse, affordability is one of the most negative headwinds facing housing today. Allow me to state my case.

Many indicators are meaningless on their own. For example, is 6% a high or a low interest rate for a 30 year fixed rate mortgage? The 6% number as such is totally meaningless. However, if one had been able to obtain it during the Volcker years when mortgage rates were oscillating around 13%, then 6% would be absolutely fantastic. On the other hand, if one is used to paying less than 4%, then 6% would appear to be prohibitively expensive.

Affordability in the broader sense is no different. It is not the present situation as such that determines bull or bear market in real estate, it is the coming change from the present situation.

There are three components that determine housing affordability: income, price and interest.

Affordability improves if incomes go up, prices come down and/or interest rates decline. It is a rather quite simple calculation on the face of it. Therefore, if housing has indeed bottomed and home prices are about to rise, the only way that affordability can remain the same is if incomes  rise and/or interest rates decline. 

Since there is no sign that wages are likely to go up a whole lot in the near future, the only way home prices can rise without affecting affordability is for interest rate to decline further. How much further would rates have to decline to raise prices? Bernanke has spent trillions in an effort to drive rates down to current levels, so how much more would Bernanke have to print in order for this to have a noticeable effect?

Home prices can also go up if affordability goes down, if buyers are willing and able to pay higher prices and qualify for a higher loan amounts. There is a very interesting piece of data that is worth watching in this context, from a recent DQNews press release: (this is pertaining to California):

 

„The typical mortgage payment that home buyers committed themselves to paying last month was $901. That was up slightly from January's $893, which was the lowest since $882 in February 1999. Adjusted for inflation, last month's typical payment was 59.8 percent below the 1989 peak of the prior real estate cycle, and 67.4 percent below the 2006 peak of the current cycle.“

 

This is the present situation: a $901 payment per month equals a $188,000 loan at 4%.

This was the situation at the February 1999 low: $882/month equaled a $136,000 loan at 6.34%, which was approximately the prevailing mortgage rate at the time.

In other words, over the last 13 years, California's home buyers/mortgage borrowers have increased their average loan amount by 38.2%, while the mortgage payment only increased by 2.15%.

One could conclude from this, all else equal, that if not for Greenspan's and Bernanke's monetary pumping and 'QE' operations and if mortgage rates had stayed at 6 3/4%, home prices in California would be just 2.15% higher today than they were in 1999, unadjusted for inflation.

I personally draw the conclusion that affordability has actually been pushed to its very limits. Any improvement would have to come from even lower interest rates. I further expect to see the current flurry of activity in housing to fizzle out over the next couple of months as there simply is no purchasing power to drive up prices.

 


 

Wages and salaries divided by CPI, a rough approximation of 'real wages' – these haven't really gone anywhere over the past few years, which seems unlikely to change in the near future. 

 


 

Addendum: The „Dream“ Is Alive and Well, The Dowmpayment is Still MIA

by Pater Tenebrarum

 

A recent survey of putative home buyers by the Pulte Group had the following results:

 

Among the top reasons renters indicate they have increased their interest in buying a home include:

lThey like being able to call themselves homeowners (49 percent)

lThey view it as a good financial investment (44 percent)

lThey need more space for their family/kids (36 percent)

 

The survey also revealed that deterrents – both real and perceived – still persist, preventing some renters from pursuing or achieving the dream of homeownership. The top three reasons indicated by current renters for not purchasing a home sooner include:

lNot enough money for down payment (54 percent)

lThe belief that renting is cheaper than buying (28 percent)

lUncertainty with employment status (23 percent)

"Clearly the dream of homeownership is alive and well in America, yet we still have a ways to go to ensure more renters are able to take that important step towards buying their first home," says Deborah Meyer, senior vice president of Pulte Group. "Homeownership is more attainable than ever with historically low mortgage rates and competitive pricing, as well as affordable new homes designed for first-time home buyers coming into the market.

"We are seeing a renewed sense of optimism, especially from young professionals and young families visiting our communities nationwide," continued Meyer. "In fact, in the first quarter of this year, sales and traffic for our Centex homes, which caters to the value-conscious and first-time buyer, saw a significant improvement over last year – yet another sign of an improving housing market."

 


(emphasis added)


[We have emphasised the single most important point above, ed.] 


54% think they do not have enough money for down payment, which I take it to mean they live totally hand to mouth and have not a dime in savings, just credit card balances.


 


 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

One Response to “Understanding Affordability”

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Trade War Game On!
      Interesting Times Arrive “Things sure are getting exciting again, ain’t they?”  The remark was made by a colleague on Tuesday morning, as we stepped off the elevator to grab a cup of coffee.   Ancient Chinese curse alert... [PT]   “One moment markets are gorging on financial slop like fat pigs in mud.  The next they’re collectively vomiting on themselves. I’ll tell you one thing.  President Trump’s trade war with China won’t end well.  I mean, come...
  • The Dollar Cancer and the Gold Cure
      The Long Run is Here The dollar is failing. Millions of people can see at least some of the major signs, such as the collapse of interest rates, record high number of people not counted in the workforce, and debt rising from already-unpayable levels at an accelerating rate.   Total US credit market debt has hit a new high of $68.6 trillion at the end of 2017. That's up from $22.3 trillion a mere 20 years ago. It's a fairly good bet this isn't sustainable....
  • Rise of the Japanese Androids
      Good Intentions One of the unspoken delights in life is the rich satisfaction that comes with bearing witness to the spectacular failure of an offensive and unjust system. This week served up a lavish plate of delicious appetizers with both a style and refinement that’s ordinarily reserved for a competitive speed eating contest. What a remarkable time to be alive.   It seemed a good idea at first... [PT]   Many thrilling stories of doom and gloom were published...
  • US Stock Market: Happy Days Are Here Again? Not so Fast...
      A “Typical” Correction? A Narrative Fail May Be in Store Obviously, assorted crash analogs have by now gone out of the window – we already noted that the market was late if it was to continue to mimic them, as the decline would have had to accelerate in the last week of March to remain in compliance with the “official time table”. Of course crashes are always very low probability events – but there are occasions when they have a higher probability than otherwise, and we will...
  • Getting High on Bubbles
      Turn on, Tune in, Drop out Back in the drug-soaked, if not halcyon, days known at the sexual and drug revolution—the 1960’s—many people were on a quest for the “perfect trip”, and the “perfect hit of acid” (the drug lysergic acid diethylamide, LSD).   Dr. Albert Hoffman and his famous bicycle ride through Basel after he ingested a few drops of LSD-25 by mistake. The photograph in the middle was taken at the Woodstock festival and inter alia serves as a...
  • Claudio Grass on Cryptocurrencies and Gold – An X22 Report Interview
       The Global Community is Unhappy With the Monetary System, Change is Coming Our friend Claudio Grass of Precious Metal Advisory Switzerland was recently interviewed by the X22 Report on cryptocurrencies and gold. He offers interesting perspectives on cryptocurrencies, bringing them into context with Hayek's idea of the denationalization of money. The connection is that they have originated in the market and exist in a framework of free competition, with users determining which of them...
  • From Fake Boom to Real Bust
      Paradise in LA LA Land More is revealed with each passing day.  You can count on it.  But what exactly the ‘more is of’ requires careful discrimination.  Is the ‘more’ merely more noise?  Or is it something of actual substance?  Today we endeavor to pass judgment, on your behalf.   Normally, judgment would be passed on a Thursday, but we are making an exception. [PT]   For example, here in the land of fruits and nuts, things are whacky, things are...
  • No Revolution Just Yet - Precious Metals Supply and Demand Report
      Irredeemably Yours... Yuan Stops Rallying at the Wrong Moment The so-called petro-yuan was to revolutionize the world of irredeemable fiat paper currencies. Well, since its launch on March 26 — it has gone down. It was to be an enabler for oil companies who were desperate to sell oil for gold, but could not do so until the yuan oil contract.   After becoming progressively stronger over the past year, it looks as thought the 6.25 level in USDCNY is providing support for the...
  • The “Turn of the Month Effect” Exists in 11 of 11 Countries
      A Well Known Seasonal Phenomenon in the US Market – Is There More to It? I already discussed the “turn-of-the-month effect” in a previous issues of Seasonal Insights, see e.g. this report from earlier this year. The term describes the fact that price gains in the stock market tend to cluster around the turn of the month. By contrast, the rest of the time around the middle of the month is typically less profitable for investors.   Due to continual monetary inflation in the...
  • Flight of the Bricks - Precious Metals Supply and Demand
      The Lighthouse Moves Picture, if you will, a brick slowly falling off a cliff. The brick is printed with green ink, and engraved on it are the words “Federal Reserve Note” (FRN). A camera is mounted to the brick. The camera shows lots of things moving up. The cliff face is whizzing upwards at a blur. A black painted brick labeled “oil” is going up pretty fast, but not so fast as the cliff face. It is up 26% in a year. A special brick, a government data brick of sorts, labeled...

Support Acting Man

Item Guides

Top10BestPro
j9TJzzN

The Review Insider

Austrian Theory and Investment

Archive

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com

Diary of a Rogue Economist