High Housing Affordability, Low Mortgage Rates Boost Pending Real Estate Sales

WASHINGTON (MarketWatch) -- Pending sales of existing homes rose for the third month in a row in April, boosted by record-low mortgage rates and special incentives for first-time buyers, a real estate trade group reported Tuesday. The pending home sales index for April rose 6.7% after a 3.2% increase in March, the National Association of Realtors said. The index, based on sales contracts on existing homes, was 3.2% above April 2008.

With mortgage rates hovering near all-time lows, housing affordability has improved, said Lawrence Yun, chief economist for the NAR. Yun expects existing-home sales to rise about 17% by the end of the year to a seasonally adjusted annual rate of 5.48 million.

A separate report on housing affordability recently released by the National Association of Realtors indicates that housing affordability remains at near-record levels (see chart above). In April, the Housing Affordability Index (HAI) increased to 174.8, up almost three full points from 171.9 in March, largely because of historically low mortgage rates of 4.96% (April average) and stable home prices and income levels. Except for the 176.9 index reading in January, April's affordability measure of 174.8 was at an all-time, historic record high.

An HAI of 174.8 would mean that the typical household earning the median family annual income of $60,927 in April would have 174.8% of the standard qualifying income level of $38,848 required to purchase a median-priced existing single-family house ($169,800) with a 20% down payment, financing the remaining 80% of the sales price with a 30-year fixed rate mortgage at the April average of 4.96% (monthly payment of $726 for principal and interest).

Comments

[OptimizedPrime:]

I think one of the confusing things about real estate and reports like this one is that "real estate markets are local in nature". Whereas the nationwide trends can give you an idea of where things are going every market is going to get there at a different pace. Clearly many markets across the US have already corrected whereas others have not.

This report gives buyers a good ratio to judge your local market: take your local average income and multiply it by 3 (rounded up from 2.8 to make it easy). This gives you the level where your local median home price SHOULD be in today's climate. I bet any local market that returns to this level starts to see a "normal" level of sales activity again.

The problem is, many markets have a long, long way to go.

In my little suburb the published median household income average is $150k and median house prices are still (even after a small drop already) hovering around $1.2M. Using this rule, one would expect the median price to come down to about $450k before prices start to stablize and sales return to normal. I think this is true for many of the high-end markets where The Ratio went into orbit many years ago. These will need to come down to earth before we have a sustainable market.

Besides the affordability ratios though there are other local factors like unemployment and where people are going to get that now-required 20% down payment.

The problem is that, especially on the high-end, the answer is "nowhere". America's piggy bank for the last two decades has been their houses and built-up equity based on extremely high appreciation. In other words, high-end house buyers typically "house flip their way to the top" by cashing in the money made in the previous house as a down payment on the new one.

High-end incomes are mature incomes--people that have been in the workforce for a long time and have achieved success. Unfortunately this also means they already own a house--and they are underwater.

In short, on the high-end, all of the required down payments have been wiped out. There is virtually no support for a high-end market any more.



OP

Jun 03 08:00 AM

[Jimmy K:]

OP- you always make good points on housing. I enjoy reading your posts, I trust your calls on housing more than Mark Perrys...

Jun 03 08:40 AM

[Doug Francis:]

Looking back at old data from March and April shows how super low the mortgage rates had been... one of my clients locked at 4.5% fixed on a $584k mortgage at Wells Fargo in April!

But it is now June and rates have popped up to 5% or 5.25% for the same loan. Also, appraisals are nixing many of those pending contracts all over, so a downward revision of "pending" is my forecast (from the front yard) and buyers will ride it out until rates come back below 5%.

Things will heat up in the fall as people rush to beat the November 30th tax credit deadline.

Jun 03 09:18 AM

[Mad Hedge F...:]

the lumber market certainly sees it. Those fortunate few who took my advice to go long lumber futures (www.madhedgefundtrader...) can now go out and build a bonfire to celebrate. Since then, the homebuilder’s favorite commodity has rocketed by 35% to $200. The biggest producers, Weyerhaeuser (WY), Rayonier (RYN), or Louisiana Pacific (LPX) have also done well. The last gap up was prompted by more mustard seeds that the housing market may have hit bottom. The enormous subsidies offered to first time buyers is also helping eat into inventories. After seeing similar Chinese inspired moves in copper, crude, and coal, this is further proof of the beginning of a much broader, long term bull market in commodities.

Jun 03 11:36 AM

[pitchingpen...:]

Doug F. has it right. 60 to 90 days to process loans, appraisals coming in low, rate whipsaw to 5.5 plus, refiers waiting for 4.5 clogging the system and not closing now, unlocked purchaser's rates back up well over 5%. Pending....Pending.......

Please pass the crack pipe Mr. Yun.

Jun 03 01:07 PM

[DFJ:]

I don’t profess to be an expert on housing but have given some thought to the skyrocketing housing affordability index (HAI). As pointed out in the article the index is simply the U.S. median income divided by the cost of a 30 year fixed rate mortgage covering 80% of the value of the median priced house. In normal markets this would seem to be a consistent representation of the relative cost of owning a home.

However there seems to be a bias in the data that is affecting the results. Median income is derived from the working population and therefore is consistent over time. Median housing is derived from the actual sales data. In a normal market this data isn’t skewed to any particular housing segment and as such is a fair representation of the average price of housing. However, in this market the sales data is very much skewed. There doesn’t seem to be any argument that sales are being driven by first time home buyers and foreclosures. This effect of this skew would be to dramatically drive down the median price. As such it would no longer reflect the “average” price of housing in the U.S. It would be interesting to see what the HAI would look like if median listing prices on houses for sale were used. I realize this would somewhat overstate the price (unrealistically high asking prices, etc,) but as a reference point I would be curious as to the results. My quess is we would'nt be witnessing record high affordability

In my town we have seen the same trend. Sales are up, median prices are down and days supply of unsold homes is down. Ours is not a market that is healthy or appears to be bottoming. Sales are up only in the lowest priced category. Days supply are down only because of the recent spurt of sales in the low end. Inventory of unsold homes is down mostly due to people taking their listings off the market (either to rent out or wait for better prices). In addition we are starting to see foreclosure activity pick up in the $1 million+ category since the moratorium was lifted.

I don’t believe housing prices in the U.S. have reached fair value. Of course this is just one guys opinion but be careful to draw conclusions based upon broad numbers especially ones touted by the national association of realtors and their minions.

BTW - Mr. Perry and Mr. Yun, if you believe this is an excellent investment time in residential real estate please come to my town. There are plenty of people here to help you meet you investing goals.

Jun 03 03:37 PM