Real estate used to be considered a boring, safe asset. Your ROI might not be spectacular, but your exposure to loss was minimal. Not any more. In years past, an increase in affordability would have meant an increase of people in the market, not any more. Owning a home as gone from being considered a safe investment to a risky one:
The National Association of Realtors calculates a housing affordability index by calculating how much income is needed to purchase a median-priced home at current mortgage rates.
Back in 2006 when housing was peaking, the NAR says, the composite index was close to 100, meaning the median family income was about equal to the income needed to qualify for a 30-year mortgage.
In the first five months of this year, the index has averaged 171.2, meaning the median income earned in the U.S. is almost double what is needed to buy a home. Except for a brief period of 2009, that’s the best reading on record.
Even with the loss of the tax credit, affordability isn’t the issue. The problem is the labor market.
Unemployment has left millions unable to qualify for a mortgage. Millions who are still working are so jittery about job security that they do not want to commit to long-term debt.
That pessimism was clear in the July consumer confidence report put out by the Conference Board. The overall index fell to 50.4 this month, from 54.3 in June. After gaining ground during the spring, confidence is back to its lowest reading since February.
It is unsurprising then to see homeownership rates falling:
Millions of houses on the verge of foreclosure threaten to send homeownership to its lowest level in 50 years, according to new industry estimates.Fresh projections say the rate could plummet to about 62% as early as 2012 and almost certainly by the end of the decade. Homeownership rates haven’t been that low since they hit 61.9% in 1960.
The share of households that own their homes has been sliding since the housing bubble burst in 2006. The rate fell again in the second quarter of this year to 66.9% — the lowest since 1999 — from a peak of 69.4% in 2004, the Census Bureau says.
Finally, after years of the blogosphere criticizing the “homeownership for everyone” mantra, the policy is being questioned in the MSM. Last week USAToday quoted John Burns, CEO of John Burns Real Estate Consulting and said:
The push to own rather than rent now is being questioned. “A large percentage of households are not responsible enough to handle a mortgage payment,” Burns says. “Growing homeownership is a great goal but you have to grow the percentage of households that are responsible.”
As we’ve said since we opened our doors here in 2006. Pushing policies to shoehorn everyone into a home is irresponsible. If the goal is to achieve higher homeownership rates, it should be achieved by increasing economic activities for people and letting them choose to own a home, rather than believing that somehow if you give someone a home, it will magically transform their economic picture and allow them to afford it.
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“Back in 2006 when housing was peaking, the NAR says, the composite index was close to 100, meaning the median family income was about equal to the income needed to qualify for a 30-year mortgage.
…
Even with the loss of the tax credit, affordability isn’t the issue. The problem is the labor market.”
I believe that’s incorrect – affordability has been the issue all along. People in the past may have qualified for a $750k loan on a $50k/year salary, but they couldn’t afford it. Banks didn’t care because they simply resold the mortgage to some other sucker.
The labor market dropping is simply changing people’s attitudes and spoiling the government’s attempts to prop up lending. Without jobs, people don’t want loans.. but it doesn’t change the fact that they still couldn’t afford the payments.
BTW, that definition of “affordability” is incorrect. The NAR actually do not use the old formula for affordability. I believe it uses “first time homebuyer affordability” where it uses 85% of median with 5% down payment assumption along with 35% dti or something like that.
Say what you will, but those assumptions are already the problem. You see, when my income was rising 5% per year, 35% was uncomfortable for a few years until I “grew into my home”. Now that wages are actually falling, that 35% DTI is way, way over what people can reasonably expect, especially when if I have to find a new job, it may take 6 to 12 months to find something in the same class, if at all.
Deflation’s a bitch.
Chuck-
I must say, things never seemed that affordable to me in 2006- or any time in the last ten years. At the end of the day, I suspect the vast majority of Americans really shouldn’t spend over $150K on a home, and there are way too many homes that fall above that line.
Upper end real estate is getting hammered, and will continue to do so. Deflation and consumer sentiment have most of us convinced that the days of wine and roses are over. People are lucky to afford beer and daisies.
35% is absurd. Does this account for ALL of your debt, or just the mortgage. If it accounts for all debt, then ok….maybe. But I have always thought they were talking JUST about the mortgage, in which case, 15-20% is much more realistic. I believe they also use “gross” wages which means if you take a single male, non home borrower, making 100K….his true income is already dropped by about 25-30% (depending on where he lives). So affordable to him, by this definition would be a monthly payment of $2900. His monthly “take home” is about $6250. So by their standards, he can afford a monthly payment of nearly HALF his take home pay???? fyi, my payment (no taxes or insurance) is about 13%. I do have a credit card, studaent loan, and 2 car payments. I can’t imagine much of a higher mortgage. Sure…I could afford more if i didn’t have all of the other debt. However, I am pretty sure most people of my my demographic have car payments, at least one credit card, and student loans.
How about a reality check, eh?
If a family can afford to pay rent for 2-3 years of over $1000 a month and never miss a payment, why are they not responsible enough to afford a house note of under $1000 a month?
Most renters already pay in rent the same amount or more as a house note on a $200,000 home. It is smarter for them to buy than to rent.
It’s stupid and hypocritical to make such judgments on who qualifies without considering that the family lives somewhere and pays someone money every month.
In most American cities it is cheaper, or at least it was, to buy than to rent.
And if the family bought a reasonable home at a reasonable price, the savings would only enhance their lives.
But when housing is artificially inflated, mortgages are toxic and the nonsense about you can’t buy a decent home for under $200,000 is running rampant and seen as the cardinal rule on home buying you’re going to end up with exactly what we ended up with, a housing meltdown.
I’d say that honestly 98% of residential mortgages given since 1995 are defective and fraudulent, skewed to encourage defaulting by the homeowners within 7-10 years. The mortgages were written with the intent to cause a default, even if the buyer tried to prepay the note.
So what irresponsibility did homeowners show? They signed in good faith, the were lied to, and set up to fail, is that their fault?
And this is not even considering that the house notes are bundled and sold as derivatives without informing the homeowners.
The housing market needs a whole new plan, one that includes honesty and integrity on the part of both the borrower and the lenders.
NO more side bets, no secret sales, no bundling, no balloon clauses for prepayments, no more 30 year loans, make them like care loans for a much shorter time.
House loans should be exactly like a car loan, no reason they are not. Except for greed, the interest on a 30 year loan triples the profit of the sale price, which is collected by a company that already sold the note years ago.
What a perfect scam!
Webartogo-
I don’t see the hypocrisy, being a renter myself. For me, renting is smarter for several reasons. One, with the buy/rent ratio around here, I can live in a much nicer place, and I don’t have to pay for repairs. The other is that I can’t afford owe more than a home is worth. Thank heaven I sold the house we built in 2001 in 2005, because I’m pretty sure if I were trying to sell it today, it would be a short sale.
My current landlord was trying to talk me into buying this place, telling me the old “Why would I want to throw away rent instead of building equity?” Pretty funny considering how much I’ve watched the value of this place drop just in the last year.
Straight forward loans would help the market, but their are still very valid reasons for staying out for awhile.