The Housing Chronicles Blog: Silver lining of falling prices: greater affordability

Wednesday, May 21, 2008

Silver lining of falling prices: greater affordability

Thanks to falling prices, U.S. affordability levels for median home prices have bounced back to 54% -- 10 percentage points above the 44% level noted in the first quarter of 2007. Still, because buyers expect prices to keep falling, they remain largely stuck on the sidelines hoping for better deals to come. But in many areas, affordability levels are approaching and exceeding 90%. From a story:

With prices crashing around the nation, home price affordability has improved dramatically in many U.S. cities.

As a result, 53.8% of all new and existing homes sold nationwide during the first three months of 2008 were affordable to families earning the median household income of $61,500, according to the latest Housing Opportunity Index released Tuesday by Wells Fargo and the National Association of Home Builders (NAHB).

That's up from 44% during the first three months of 2007 with home prices the most affordable they've been since the three month period that ended June 30, 2004...

Home prices dropped about 8% compared with a year ago, according to NAHB, but that doesn't mean that buyers are flocking back to the market.

"This measure can only take you so far in implications for the market," said Dave Seiders, NAHB's chief economist. "There're several factors that the index does not capture."

These include buyer expectations. Many are reluctant to act in falling markets. That sentiment can contribute to market overshoot, according to Seiders, in which prices fall lower than would be their logical bottom.

Richard DeKaser, who, as chief economist for national City Corp., runs his own affordability studies, pointed out that three main factors influence housing market trends: demographics, like more families moving into an area attracted by jobs; sentiment, the perception that the housing market is a good investment at any point in time; and affordability.

"While affordability is an important factor that will contribute to recovery of housing markets eventually," he said, "improved affordability is unlikely to lift markets out on its own."...

The index also fails to capture the tightening of lending standards, which has been quite dramatic during the past 12 months. The index presupposes constant lending standards.

But today, lenders are requiring much higher down payments, better financial documentation and higher credit scores than they did during the boom, cutting back on the number of potential buyers.

California has been particularly hard hit by a liquidity squeeze in jumbo loan markets. These mortgages of greater than the $417,000 cap limit that Freddie Mac and Fannie Mae imposed (now temporarily raised to $729,250) are especially important to high-priced markets.

"Jumbo markets had essentially shut down, " said Seiders, "and many California markets depend on jumbo loans." These are getting a little easier to find but they still cost a full 1 to 1.5 percentage points higher than other loans.

That has helped make Los Angeles, the least affordable metro area in the United States, more affordable than last year. But still, despite much lower home prices, to a median $412,000 from $525,000, only a little more than 10% of homes sold during the first quarter of 2008 were priced low enough so that households earning the median income of $59,800 in the area could buy.

That, however, is a change from a year ago when only 3% of Los Angeles area homes sold were affordable to the average Joe...

Although home affordability improved to its best level since mid-2004, Seiders is not predicting a market turnaround anytime soon.

According to him, with job growth slowing, negative consumer sentiment and tight mortgage lending standards, it could be a while before real estate markets start climbing again.

He's predicting that housing starts won't turn upward until early 2009, that home sales will be flat through mid-2009 and that home prices will fall another 10% or so beginning to recover in late '09.

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