"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 affordable too.

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."