Upside to Falling Prices: Housing Affordabilty Index Reaches 4-Year High 22 comments
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The HAI has gone from 103.6 in July 2007 to 135.6 in February 2008. A composite HAI of 135.6 means that a family earning the median family income ($59,967) in February had 135.6% of the income necessary to qualify for a conventional loan (at 5.94%) covering 80% of a median-priced existing single-family home in February ($193,900). This increase of more than 31.6 points in the HAI in just seven months, from both falling home prices and falling mortgage rates, is already starting to have a positive effect on the housing market (February sales increased) and could continue to play an important role in the recovery process for the slumping real estate market.
Housing affordability is higher today than at any time since early 2004. For the perspective of homebuyers, aren't we now in a real estate boom, since affordability is the highest level in four years?
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This article has 22 comments:
people living within their means...
people purchasing gas sippers...
oh the humanity.
The author of this article may have a Phd but obviously he has been in the classroom way too long.
Disagree that the affordability index has increased. I am on the front lines and see buyers denied daily. Too many buyers place more emphasis on the cars, and other toys they have to obtain and finance. Too much debt!
't afford to pay these prices. Read a paper. Does mortgage crisis sound familiar.
Let's see the detail on how NAR comes to the conclusion that $59,967 allows the purchase of a $193,900 home.
1. Where does the $38.7K cash down come from? Mom & Dad? A lottery ticket? Pawn shop loan?
2.What are the assumptions on closing costs?
3. What is the real finance rate?
4. What is the debt/income ratio?
Please provide these devilish details and allow us to laugh at the "real estate boom" we're in. Finally what % of mortgages today are approved with the top line assumption of $60K buys $194K.
It is and always has been: AAA Fico, 20% down and 2.5X your gross household income = max. mortgage
Don't have it..........go get it
Considering the fact that "affordability" went right out the window in 2000, "highest affordability since 2004" is so NAR: once again, building homes on foundations of mud.
What else would you expect from an organization of used house salesmen?
Point being is that the problem with a lot of purchasers is financing. Banks won't lend very easily, credit is unusually tight right now. Once these institutions can get the bad debt off there books (and the fed is in a way helping by making a price when it loans against the securities) they can start lending more loosely again. Not like in 05' but maybe like they did before then bad credit got no loans but decent credit did.
The underlying fact is the home I bought I paid about 10% then what it sold for in 2003 (5 years earlier). 2004 was when the run up got going and peak was in 2005. On just my example it seems to me that prices are falling to where they should be. And while a 10% decline could be in order due to the fact the market tends to overexert itself when moving a direction, to think price levels will fall below prices that were there before this whole thing started is going against the grain. And it was going against the norm that got us into this mess.
for weighted avg cost of capital (7% debt at 80% of purchase price vs 15% cost of equity at 20% of purchase price) -- or me i use 8% for debt got give me what i think is normalized interest rate. the WACC is 8.6%. so calculate the tax adjusted (you have to adjust also for the std exemptions on federal taxes) cost of capital, property tax, insurance, and maintenance per month. if this is lower than a conservative market rent for the house or condo then you are guaranteed to make money in RE over time.
this doesn't mean idiots wont bid the mkt up BUT i have seen time and time again, the mkt trade below mkt rent providing tremendous oppty for home buyers -- investors and homeowners. It WILL happen. RE is long cycle so anyone who thinks the mkt will rebound like a "V" is an idiot. also, we have seen this countless times. Home prices bottom after starts (4-5 yrs after top) and stays down for another 3-5 yrs before income and inflation pushes prices higher.
if you use the method i outlined above, you will be guarantee yourself a profit (assuming there isnt problems with house or changes in the neighborhood). the other methods of using affordability index or mkt comps exposes yourself to abnormal conditions.
i can tell you that pretty much the coastal regions have a ways to go down. West coast has so much pain left, its ridiculous -- as well as FL. I have heard even ridiculous defense on why someone should pay more to own than to rent, its all a lie to protect their own interests. I've been thru a few cycles and they are all similar. we have not even gotten to a tighten credit environment -- we just went from very loose credit to nornal credit (20% down good fico scores). when we get to tighten, banks wont lend for simple condos unless you put 30% down and require owner occupancy at 70-80%. when i bought investment condos in NYC when this happened (1992), i made a fortune. i bought outer borough condos for 25-30K and its now valued at 300-400K. i dont sell because they are now yielding over 30% pre tax. so BE PATIENT and you will be REWARDED!!!
calculate the cost of capital (use 7% rate for debt at 80% of home price and 15% equity cost at 20% of home price -- WACC is 8.6%), property tax, insurance, maintenance and tax adjust the costs (you have to not overadjust for taxes because everyone has std exemptions in federal tax codes). personally i use 8% of debt cost. compare this figure on a monthly basis to conservative mkt rent. if you buy a property where cost of ownership is below the mkt rent then you guarantee yourself a profit because inflation, real wage increases and population growth will push prices and mkt rents higher.
this doesnt mean the mkt is not going to pushes prices higher where cost of ownership is higher than mkt rents BUT if you dont follow this rule you are accepting lower returns and giving money alway as we have seen in recent years.
in every cycle (been thru a few), the prices always trade to a level such that investors (landlords) can profit handsomely and hold property for over a life time. currently, we have not even hit TIGHT credit yet. We just move to normal credit -- 20% down. TIGHT is when banks require 20-30% down and 70-80% owner occupancy rate for simple condos. the last time we had tight credit was early 1990s when i bought outer borough condos in NYC for 25-35K. they are now worth 350-450K. i wont sell because they are yielding over 30% pretax in net rent (after maintenance).
so be PATIENT. Dont use affordability index or mkt comps or past prices. Use the comparison between ownership equivalent rent vs mkt rent. if you use the rates i suggested above then you guarantee yourself 15% rate of return on your equity -- which is nice if you live in your own property. in addition, if you buy right using this method, then other home buyers (not investors) will see the economic incentive to buy your property if you have sell. NO ONE will tell you this because most people are home owners or have an incentive to tell you otherwise.
from what i can see the coast regions have a ways to go -- AND it will get there as i have seen in the past. RE are long cycle assets so typically 3-5yrs of decline then 3-5 yrs of bottoming (flat dull prices changes) then a rise again. West coast prices are way too high. FL still has abit to go.
i thought it was important i posted because few apparently understand how to value RE properly.
Like Cramer advising his listeners to hold on to Bear Stearns on March 11 when the stock was trading at $63, telling people that now is the time to buy property without concrete proof that prices have stopped falling is just plain bad advice!
The way prices and the property market is going, prices could be back to late 1990's levels of affordability or earlier before that time will come.
Not by a long shot - I live in SoCal.