"A real estate market that should be flying high is
instead a real estate market that is faltering," according to Brian Mushaney,
Executive Vice President, Data Solutions, for RealtyTrac. Writing in the
current issue of RealtyTrac's Housing
News Report he points to a market which he says should be a buyer's
paradise in many ways, with property values well below historic affordability
levels, banks with tons of cash to loan, interest rates near their all-time
lows, and foreclosures abating.
"So why," he
asks, writing, "have home sales stalled in recent months? It is an issue of affordability he says, but
not the way we usually think about it.
The 30 percent of income as a measure of the maximum
to be spent on housing doesn't work today because markets vary enormously. The
better approach is a relative measure that compares a market or a micro-market
to itself rather than to other markets.
He uses Omaha and San Francisco as examples of two places that are
essentially incomparable. The percentage
of income needed to buy in Omaha (17 percent in a recent survey) won't work in
San Francisco. Even though median
household incomes are 45 percent higher in the latter area, it requires 75
percent of that median income to buy.
Looked at another way, the MIT Living Wage
Calculator shows it takes $18.64 per hour for a household with two adults and
two children to "make it" in Douglas County, Nebraska (Omaha) whereas the same
family would need $25.44 in San Francisco.
Mushaney said that "for our purposes" affordability
raises two issues. First, communities
which are not affordable will soon run out of teachers, first responders and
many other professionals the community needs to survive. "Second, when affordability sags you have
fewer first-time buyers and that means trouble."
RealtyTrac's data shows that sales of lower priced
houses, those most likely to be first-time purchases, have "fallen through the
floor. It's the clearest demonstration
of a first-time buyer affordability gap."
And without first-time buyers there will be no buyers able to move to
their second home and so on up the tiers.
So back to the issue of affordability. Home prices rose quickly last year but
appreciation has slowed and real estate values have not yet reached (except in
a few cities such as the major ones in Texas and in Denver) to their previous
pre-crisis peaks. So property, the
author says, is comparatively affordable.
Then too, "lender vaults are stuffed with cash",
perhaps as much as $2 trillion in excess funds and that has caused mortgage
rates to stall in the low 4 percent range whereas just before the housing
crisis (April 2007) the Freddie Mac rate was 6.18 percent. This means a huge differential in
payments. A $200,000 loan in 2007 would
have carried a payment of $1,222.34; at the end of this past July the Freddie
Mac's 4.12 rate would cost the borrower $958.72 each month.
While today's rates are higher than in 2012 the more
important point, he says, is that the average mortgage rate over the past 40
years has been 8.6 percent so rates today represent a better than 50 percent
discount. Therefore mortgages are
So Mushaney says, if home prices are down from 2007 and
mortgages rates are half off of historic norms then affordability "should be
soaring." But that is not the case. "The problem is that in a market filled with
great real estate deals and cheap financing incomes are down." The national average income in 2012 was $51,017,
9 percent lower than in 1999 while buying power has declined even more. It takes $1,430 today to purchase goods and
services costing $1,000 in 1999.
A RealtyTrac analysis of median household incomes
shows a decrease in real terms in 43 percent of the nation's 3,100 counties
between 2008 and 2012. "Among all
counties, even those with increasing income, the average change in income was
just 2 percent." During the same period
the Consumer Price Index increased 9 percent as median home prices dropped 22
percent. Since 2012 home prices have
bounced back by 22 percent while the CPI has risen 3 percent. Median income data is not available post 2012
but Mushaney says it is unlikely it has jumped 10 percent in two years to catch
it up with the 12 percent rise in the CPI since 2008. The bottom line, he says, is that consumers
now need to spend more of their income on other goods and services and have
less left over for housing than before the recession.
He concludes that the core barrier to higher real
estate sales has nothing to do with home prices or mortgage rates but rather
with jobs and income. "Simply put, we
don't have enough jobs, the job we do have don't pay enough, and the result is
that homeownership levels are at their lowest point in 19 years."