WHY HOUSING ISN’T AS CHEAP AS IT LOOKS

REAL ESTATE TOPICS

Source: Wall St. Journal

While economists expect the housing industry to strengthen this quarter as improving weather releases pent-up demand, there are concerns about the underlying momentum of improvements in the housing market due to concerns about affordability. Despite the fact that sales of previously-owned homes edged up 1.3 percent in April to a seasonally adjusted annual rate of 4.65 million units, thereby reversing four straight monthly declines, many experts blame last summer’s increase in mortgage rates for a broad slowdown in housing activity that began last fall.

Making sense of the story

• While the NATIONAL ASSOCIATION OF REALTORS’® housing affordability index shows that housing is still more affordable than anytime between the early 1990s and 2008, sales were still 6.8 percent below their levels of a year earlier, despite an increase in April.

• Affordability could be enhanced by mortgage rates that are still below 4.5 percent, which is a rate that was unheard of before 2011, and home values are still well below their bubble-era peak. However, access to affordability assumes borrowers have down payments of at least 20 percent and that they’re able to qualify for the lowest mortgage rates.

• For marginal borrowers, including many first-time buyers, the picture of affordability is different. Since many of these marginal borrowers are obtaining loans from the Federal Housing Administration, they are paying higher insurance premiums because the FHA raised its rates.

• With the higher insurance premiums, the effective rate paid by FHA borrowers, once premiums and other costs are baked in, stood at around 5.65 percent. As a result, mortgage rates for these marginal borrowers are higher than those used to gauge affordability for the market as a whole.

• Goldman Sachs economists Marty Young and Hui Shan commented, “While focusing on the median family is one way of gauging housing affordability, another way is to focus on the marginal buyer who is arguably more relevant for determining house prices. Put differently, the prices that we observe should be determined by how much the marginal buyer is willing and able to pay.”

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• Goldman constructed a separate index to measure affordability for just marginal buyers, and it found that the payment-to-income ratio is closer to its historical average of 23 percent, thereby making a home less of a good deal than the 15 percent average experienced by overall buyers.

• While housing affordability has improved recently for the market as a whole, it’s actually gotten worse for marginal buyers.