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Home Prices are Not Affordable

Wednesday, 12 June 2013 04:26

A NYT blog post on the impact of the rise in interest rates on the economy commented:

"Many real estate analysts say that homes are so affordable that even a considerable rise in interest rates would not do much to undermine the housing recovery, especially if the economy is growing at a healthy rate."

Actually homes are not especially affordable. Inflation adjusted house prices nationwide are more than 15 percent higher than their long-term trend. They are still down considerably from their bubble peaks, but that hardly means that prices are low. Of course even with the recent rise in mortgage interest rates, mortgage rates are still at extraordinarily low levels.

Comments (10)Add Comment
written by Last Mover, June 12, 2013 5:16

Houses are certainly affordable to economic predators going into blighted areas and snapping them up hundreds at a time for a song in concentrated areas to rent to those who can no longer afford to buy, after what the predators did to them in the first place.
written by JSeydl, June 12, 2013 7:21
Maybe the NYT is referring to NAR's housing affordability index, which shows that affordability is near series-high levels.

Affordability Index
written by Dean, June 12, 2013 7:25
they may be referring to this index. The index is hugely sensitive to mortgage interest rates. Not that house prices were still very affordable in 2004 not far below the peak of the bubble and even at the peak were only back to their early 1990s level of affordable. Hence the realtors' advice to buy.
written by watermelonpunch, June 12, 2013 8:14
What Last Mover said. :|

Isn't saying home prices are "so affordable" kind of like saying minimum wage is enough to live on?

Okay yeah, work 60 hours a week for minimum wage, go into huge debt to buy a 2 bedroom house & share it with 6-10 people... Make sure it's within walking distance of your work, so you don't need a car, and heaven knows public transport sucks most areas. At least 2-3 people in your household need to also be working for minimum wage, and at least 1-2 who should be able, and have the time, to cook from scratch & wash clothes by hand (or at least spend hours at a walking distance laundromat)...
Whatever you do, don't have a colour television, a cell phone, or internet... Because you CAN afford to buy a house if you weren't just blowing your money on things like a car, a washing machine or a refurbished PC, or anything that would allow you to seek new employment or ensure your own safety, or free up more time to work more hours for low wages.
*roll eyes*

I think economists need to come up with a way to calculate "affordable" the way my parents taught me to calculate affordable... IE: affordable without carrying a bunch of car loan & credit card debt, and certainly without needing food stamps or child tax credits.

But I get it. The problem is that anymore nobody calculates anything for "those people".

They calculate stuff by how affordable it is for hedge funds & heirs to invest in it. Not by how affordable it is for working people.
Home Prices
written by JayR, June 12, 2013 8:25
"...even a considerable rise in interest rates..." Wow just about the only reason I can think of that homes are still somewhat affordable is the very low interest rates. I guess you could redefine "considerable rise" to be something very minor like the 15 year going from 3.00 to 3.03 which mortgage rates did fairly recently.

With wages flat for most Americans one would have to explain were the extra 15 percent was coming from if interest rates alone did not account for affordability. For instance you would have to show that Americans were saving less for retirement or putting aside less for their kids to go to college. The money has to come from somewhere. This screens out BUBBLE.

written by James, June 12, 2013 10:23
"..homes are so affordable that even a considerable rise in interest rates..."

These self-proclaimed analysts are betting the good old days in that people median income can at least get them into a 3-yr ARM with negative amortization, i.e., no principal payment and interest only for 3, 5, or 7 years.

So if at the end of 7 years and price continues to go up, you could either sell for a profit or refinance with price appreciation equity.

They are talking more non-coastal markets. You look at the coastal cities like SF, LA, San Diego, Santa Barbara, New York, all have prices significantly more than median household could afford.
Attorney (Real Estate)
written by BillF, June 12, 2013 2:34
Because most home purchases in the US are financed with fixed rate mortgages, home prices must be analyzed in conjunction with prevailing interest rates. Home buyers make purchase decisions not based on price, but on monthly payments. This is generally not true in most of the world. In the UK, for example, most if not all mortgages are adjustable rate. This make price a more important consideration, since (at least rationally)affordability is a function of expected interest rates over time.

Looking at the current situation, relatively high prices are being supported by very low interest rates and supply shortages at least partially engineered by the government and banks holding on to substantial numbers of bank REOs.
Yes, they (were)
written by RB, June 12, 2013 11:50
As BillF says, people buy on the basis of monthly payments. I bought last year in Southern California, and on an after-tax basis owning was about 2/3 the cost of renting a similar home. Why wouldn't I then buy on a monthly payment basis? If I have to move, I just rent it out and it is already cash flow positive in the first year of ownership, something that was atypical for houses in this area in the past. With the house price increases of this year and the rise in mortgage rates, the gap has considerably narrowed to perhaps a 5% discount to renting now.
written by CaitlinO, June 13, 2013 10:23
If the median house price is more than 2.5 - 3.0 times the median household income, then houses are not affordable.

The NYT reported that median US income was $51,404 in February 2013 and the NAR reports median US house prices at $192,800 in June 2013.

With continued wage stagnation and low work force participation, more and more Americans are going to find that home ownership is simply out of reach.



written by Oscar Betancur, June 13, 2013 10:23
Houses will never be affordable. Most buyers save little towards retirement so while on paper it looks like they can afford the monthly payment on this modest house (for the privilige of being a home ower) the truth is they can't afford to 1)adequately fund their retirements and 2)jump into the house bidding game. Even if the home buyer sits down with a FA/CFP to determine what the appropriate % of their income should be going into the mortgage (vs other asset clases in their investment portfolio) most home bidders will not do this. Instead the majority of middle income buyers use nearly all of the approved loan amount, and as a class, bid up the prices of homes to the point that they are still 15% above the averages even after a total RE wipeout.

House prices today reflect a total disregard for middle income retirement planning, an all asset eggs in one basket: real estate. It's a one dimensional asset class strategy leaves them prone having negative net worth with each RE bubble. Having more asset class diversification in their portfolio would greatly protect and enrich the average American's financial health but they are continually fed nonsense by the RE industry. RE is a great investment is you can afford to buy and flip in an expensive zip code or can manage to buy in a "low RE tax zip code" where institutional investors aren't temporarily and artificially lifting prices despite slipping wages for that zip code. It's a minefield for the average American who is completely unaware of all the chicanery and manipulation by banks, the Fed and investors -- high risk, low rewards.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.