Tuesday, December 16, 2008

One Up-Side: More Affordable Houses

This is an interesting graph. I found it via John Wake's Arizona Real Estate Notebook (John found it on Seeking Alpha). Click the chart to enlarge, use back button to return.


It's an oddly upside-down chart.

On all the charts and graphs we see in the media lately, lines rocketing higher to the right mean “Bad”. This chart is different.

Stand on your head or turn your display screen upside-down.  The line marching upward to the right here means “Good”. Houses are getting more affordable. Quickly.

This October's index number (141.8) means that "a family earning the median family income had 141.8% of the income necessary to qualify for a conventional loan covering 80% of a median-priced single-family home" (quote from Seeking Alpha, but I suspect the language is NAR's).

In English, the average American family can now easily qualify for a mortgage large enough to cover 80% of the cost of purchasing the average American house.

One problem, of course is that pesky 20% down payment that lenders are now requiring. Bad, bad lenders! <tongue in cheek> For cash-strapped Americans who've become used to spending every dime we make and then some, coming up with 20% of the purchase price of the average American home is next to impossible without winning the lottery or gaining an inheritance.

In Maricopa county, the median home price is somewhere near $176,000. Twenty percent of that is over $35,000. How long would it take you to save $35,000?? The disappearance of No Money Down home loans (and 80/20's and 125% cash-out refi's and all the rest of those "liar's loans") means that fewer buyers are actually able to buy a home now, regardless of how much of a mortgage they'd qualify for.

Another problem - arguably the overriding problem for the entire world economy right now - is the confidence factor. Americans lack confidence in their own (and the country's) near-term financial future. Most of us are afraid things will be worse in 6 months, so we've all stopped spending. Of course I'm generalizing but you get the point.

As one commentor on Seeking Alpha put it, "Now that almost nobody can afford a tent, castles are cheap."

An optimist at heart, I can ususally find something to be hopeful about. So, where's the good news in this scenario? Here:

  1. No matter your feelings about NAR and their statistics, houses are getting more affordable as foreclosure sales depress pricing.

  2. Today lenders are making it harder to qualify for a mortgage, as they over-react to their own boom-years greedy practice of giving a loan to anyone who could breathe in and out. But eventually that pendulum will stop swinging wildly as lenders find ways to grant home mortgages to folks with less than 20% down.

All recessions end. I don't know when or exactly how this one will end, but it will end.

When we get there, houses will still be relatively affordable, mortgage money will be flowing again to those who can reasonably afford it, and buyers will begin buying homes again in large numbers.

We won’t all qualify to buy a castle, but neither will we all be living in tents.