With mortgage rates at their lowest levels in decades and home values down almost 18 percent from 2007 there shouldn’t be much of a debate regarding real estate affordability. Reported affordability levels are sky-high and yet a new study says traditional affordability measures are wrong.
This is a big deal because if homes are less affordable than believed it could explain why real estate sales are dragging — and rental rates are rising.
According to the National Association of Realtors, affordability during the first quarter of 2012 surged to the highest level since records have been kept.
The Association said a household could afford a $325,000 home if they earn just $61,000. That’s a lot of real estate, more than twice the $158,100 paid for a typical existing home.
And yet a new report from the Joint Center for Housing Studies at Harvard University says affordability may not be as realistic as the numbers suggest.
“Despite record-low housing prices and mortgage interest rates,” said the Center, “the national homeownership rate continued its slide in 2011. With upwards of two million foreclosures still in process and a rising number of households choosing to rent, further declines lie ahead. Tight credit conditions amid uncertainty in the mortgage market are dampening the recovery in home buying, while depressed prices are preventing many distressed homeowners from refinancing to more affordable loans.”
In other words “affordability” may not be a very practical measure.
A good example of the distance between affordability and real world results concerns the issue of mortgage lending. If you have 20 percent down and good credit you should be an excellent candidate for a new mortgage. In fact, it may not happen. According to Federal Reserve Chairman Ben Bernanke even well-qualified borrowers with 20 percent down cannot get home loans.
Foreclosures & Short Sales
As a recent CNN headline explained: “Home Buying Much Cheaper Than Renting.” Despite this reality we have a surplus of renters caused in part by the inability of qualified buyers to pass through the loan process. This economic kink in the system is good news for investors who now enjoy cheap acquisition prices — especially for short sales and foreclosures — plus rising rental rates.
“For the first time in decades,” says the Financial Times, “it is cheaper to buy a home than rent it across much of the US. Home prices are down 35 per cent from their 2006 peak and mortgage rates are at record lows. Even so, residential vacancy rates have dropped, rents are soaring and investors are driving up prices for buildings in many US cities.” (See: “Rental demand fuels US property market, May 21, 2012 )
At a time when real estate should be supremely affordable by the usual measures and standards it turns out not to be the case. Instead, we have an affordability shortfall — and more rental demand and less pressure on home prices as a result.
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