11-7 “Affordability” – Housing’s Red Herring
This report was first published as part of the Mortgage Pages series on August 11, 2009.
- Affordability is the Housing Market’s Red Herring
- Ultimate Affordability-Through-Leverage From 2000 – 2009
- Median House Prices & Monthly Payment Affordability From 2000 – 2009
- Ready Home-Buyer Population Considerably Smaller than Ever Before
- Jumbo Affordability – From ‘Everyone’ to ‘No One’
Our mission is to provide our clients a significant edge. This is done by turning the daily, market-moving real estate and mortgage news flow and events into old news by the time it makes headlines. – Mark Hanson
You hear continually that ‘affordability is through the roof’ after such dramatic house price deprecation across the nation. The affordability factor is an especially important validation metric to speculators in the hardest hit bubble states such as CA. But because most are gauging today’s affordability relative to house prices during the bubble years (“prices are down 50% from the peak!”), it’s not an apples-to-apples comparison. I argue that in this unprecedented time very little is as it appears or can be measured using historical context, especially the bubble years.
From 2003-2007 we saw mortgage and housing risk-taking and leverage conditions that never existed before and won’t for a long time (that is if you don’t count mortgage mods as the most exotic loan ever). Therefore, even after an outright collapse in CA house prices, affordability for like-priced properties today is not as favorable as it was during the bubble years when loans were easy and leverage extreme.
Additionally, the available pool of buyers has shrunken considerably, which is a key element for any meaningful analysis, always left out by the traditional economists. First timers and investors can’t carry this market for much longer. In fact, there are signs right now that these two buyer groups are getting full and negative YoY CA comp sales will be coming soon. That should make for interesting news. This housing market has no comparable.
Ultimate Affordability-Through-Leverage From 2000 – 2009
If houses were most commonly purchased for cash, they are no doubt cheaper relative to income and rents than they were during the bubble. That is why buy-and-rent and flipper investors make up such a large percentage of present day buyers. But household affordability is a different story. Since most owner-occupied buyers finance their house, in order to really compare today’s affordability relative to the bubble years you must also analyze the most popular financing types during each phase of the market.
In CA, from 2000 – 2009 the top financing types changed dramatically from primarily a fixed rate market in 2000-2002; to an interest-only ARM market in 2003 – 2005, which was responsible for the bubble’s first turbo-appreciation period; to a stated income, Pay Option ARM, 100%, and HELOC market from 2006 to 2007, which prevented house prices from falling in 2006; and finally back to a fixed rate market for the past two years, which looks much closer to circa-2001 and prior than any time since.
Below is a nine year chart of the monthly payment amount it took to buy today’s CA median priced house. This chart captures all phases of the mortgage and housing space since 2000 and the affordability-through-leverage that the bubble years provided.
In the past nine years — depending upon which loan program was in favor — borrowing $254k cost anywhere from $1125 per month at the height of the bubble in 2006 during the Pay Option phase to $1970 per month in 2000 at the early innings of the bubble. Today that same home costs $1800 per month. Yes, income has risen since 2000 but household debt levels and unemployment have risen as well. Wages are left out of this chart purposely because compared to the payment increase from 2006 to 2009, the wage gains are insignificant. The bottom line is that like-kind affordability has fallen dramatically in the absence of exotic loans.
- Median House Prices & Monthly Payment Affordability From 2000 – 2009
- The Housing Market is in a Very Fragile State
- Ready Home-Buyer Population Considerably Smaller than Ever Before
Obviously, not every loan made during the various bubble market stages were exotic high-leverage, but enough were to keep goosing prices higher and forcing buyers to chase the market. As prices rose, many kept their personal affordability in check by putting more cash down while others chose exotic loans or zero down. Whatever it took, buyers, lenders, Realtors and builders were there with the solution. Unlike today, high-leverage exotic loans put houses in most communities within reach of the median household income.
Yes, based upon the monthly payment needed to afford the median CA house price today as depicted in the chart below, the traditional definition of affordability is better. But when you factor in total debt load, unemployment and epidemic negative equity — the latter which has sidelined the majority of the move-up buyers indefinitely — the housing market is in very fragile state. There is only one thing that can permanently fix this market…lots of time.
With interest rates relatively low, the monthly payment for the median price house today is even less than in 2000 through 2002, which was when mortgage finance last looked closest to today. However, today’s buyer is much different than before and the available home buyer population is considerably smaller.
With home ownership rates and negative equity as high as they got during the bubble, who is left to take advantage of this new found historical definition of affordability?
You got it — most sales are to the first time homeowner and investor population, who can’t carry the real estate market in their own for very much longer. Throughout history — and especially since 2000 — the move-up buyer controlled the market. With exotic loans, nearly every homeowner could sell and move-up. Even if you had no equity you could sell and get a 100% loan to move up. Now, only the minority of homeowners have that luxury. And even for those organic move-up buyers that do exist today, buying a house is much more difficult with respect to qualifying and the required down payment.
For the sake of not getting too complicated, in the chart below I did not make any allowances for stated income or stated asset loans, both of which provided the ultimate in affordability to anyone with a job for two consecutive years. Over 80% of Alt-A loans during the bubble were limited documentation loans. The effects this had on the affordability factor goes without saying. It is also important to note that the household debt is much greater in 2009 than it was at the beginning of the decade making the amount of household income that can go toward a house payment less.
Interesting observation: In 2002 and again in 2005 when the monthly payment amount for the median house grew to a level that made housing unaffordable, new higher-leverage loan programs came out that brought housing back to an affordable level. Again, the assumptions below are based upon fully documented loans. When stated income loans became mainstream in 2004, it simply allowed the bubble to continue unabated until exotic loans went away in 2007.
Bottom Line: In order to qualify for today’s median house price of $254k a monthly income of approx $5500 is needed with little other debt. In 2006 at the height of the bubble — when Pay Option ARMs made up 25% of all mortgage loans in CA and the median price was $556k — the monthly income needed to legitimately qualify was $6000. In 2003, the income needed to buy the $372k median priced house was only $4900 a month. Now, that is what I call affordability.
Jumbo Affordability – From ‘Everyone’ to ‘No One’
The chart below is the same as the first chart in this report but tracking a $700k loan through the past nine-years of bubble. In 2000 – 2002 and again in 2008 – 2009, the monthly income needed to qualify is $15k, or $180k a year with little other debt. However, at the height of the bubble in 2006 when Pay Option ARMs were en vogue, a household income of $110k per year could legitimately qualify for the same loan amount.
A household income of $110k is not out of question for working couple — one as a checker at Safeway and one a mailman (both great jobs with a combined gross income of over $100k). But, now the buyers must be rich. During the bubble, buyers in this price range were everywhere especially since they could easily sell their present property for the down payment (if needed) for the new house. However, an income of $180k per year needed to qualify today — in addition to a hefty down payment — has reduced the available buyer population dramatically.
Last but not least, a good story came out of the Journal today that highlights the trouble in finding buyers that the housing market faces going forward, although the story focused on stocks. The indented excerpts below are what few consider when evaluating housing affordability. In order to read the full story, click the link below.
AUGUST 10, 2009
Debt Burden to Weigh on Stocks
Consumers’ Inability to Drive Economic Growth Likely to End Big Gains
By E.S. BROWNING and ANNELENA LOBB
“The debt data are striking. According to the Federal Reserve, total household indebtedness peaked at the end of 2007 at 132% of disposable income. That was by far the highest level since at least the end of World War II, nearly quadruple the 36% of 1952. By the end of March, with families boosting savings, repaying debt and defaulting, the ratio had fallen to 124%, a tad lower but still miles from the level of, say, 69% in the middle of 1985.
Consumer spending today accounts for two-thirds or more of economic output. But as they boost savings and cut borrowing, consumers can’t be the drivers of economic growth that they were at the end of other recent recessions.
Consumer borrowing fell in June for the fifth consecutive month. The savings rate, which had fallen below zero in 2005 as a profligate nation spent more than it earned, was back to 6.9% of disposable income in May. It pulled back to 4.6% in June, but as people struggle to repay debt, many economists expect the savings rate gradually to return to the 7% to 10% range of the post-war years.
“Consumers are under significant financial pressure,” Goldman notes in its report. “The weakness in household income — partly resulting from the sharp slowdown in hourly wage growth — will make it harder to raise saving without significant constraints on consumption.”
“In an effort to make sense of the increasingly intense disagreement, Bridgewater Associates, an often-contrarian money-management firm that oversees about $72 billion in nearby Westport, Conn., has recently sent clients a series of reports.
Although the reports are complicated and detailed, their essence can be summarized simply. The optimists see signs that the recession is ending, and they forecast the normal next step: a stronger stock market. The pessimists believe the most important development isn’t the end of the recession, it is the long process of debt reduction by families and businesses. Bridgewater lines up with the pessimists. It has been trying to avoid stocks tied to the U.S. economy in favor of those linked to the emerging economies of the developing world, notably China.
The bulls believe the economic and stock-market recoveries will continue to look like a V. The pessimists fear they will be more like a W — or even a succession of W’s.”
Best Regards,
Mark Hanson
This document is for your private information only. In publishing research, Mark Hanson and M Hanson Advisors are not soliciting any action based upon it. Mark Hanson and M Hanson Advisors publications contain material based upon publicly available information, obtained from sources that we consider reliable. However, Mark Hanson and M Hanson Advisors does not represent that it is accurate and it should not be relied on as such. Opinions expressed are current opinions as of the date appearing on Mark Hanson and M Hanson Advisors publications only. Mark Hanson and M Hanson Advisors are not liable for any loss or damage resulting from the use of its product. Mark Hanson and M Hanson Advisors are Limited Liability Corp registered in CA.
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| Filed on: November, 7 2009 by markmti
