Homes More Affordable Now Than Ever? (RE market, 5%, investments, mortgages)

[elflord1973]

Originally Posted by boocake

Does that make anyone take pause at the fact that the general consensus seems to be that homes are still 20 to 30% (in general) overpriced?

Not really. The numbers come from the real estate industry lobby. I couldn't find long term historical data on their website, so it's difficult to analyze numbers from 2000 or so, which makes it hard to verify their claim that housing is more affordable now than in 2000.

They do not take property taxes into account, and these can have a substantial impact on costs.

[elflord1973]

Originally Posted by fairmarketvalue

The only ones polled in this "consensus" are the ones who are wishing to buy and hoping the nice home they really seek, comes down to this unrealistic "20-30%".

Those numbers are based largely on historical valuation ratios.

It won't happen, especially since homes already started dropping in late 2006, through '07, and 1/2 of '08.

That's essentially the "gamblers fallacy" (e.g. that flipping tails increases the probability of flipping a head on the next try)

You can't honestly think that after some areas have already fallen 30%, they go another 20-30? That would really mean 50-60%.

First, your math is bad. The fall would be 51-44% because the second drop is off the remaining 70%.

Second, if we go by historical valuations, a cumulative drop of 40% is about right, at least in my region (housing prices doubled, incomes went up 20%)

The bubble hasn't burst yet. Real estate prices are slow to correct because sellers don't want to sell for market price. The correction is driven by forced sales and a need to liquidate inventories, but even that is slowed by political measures to rig the market (e.g. foreclosure prevention measures, lower rates, etc). The market won't pick up until the inventories clear out. Rates coming back up again will also push prices further down.

The Case Shiller futures market predicts drops out until late 2010.

[elflord1973]

Originally Posted by HappyTexan

If median income is $50K then NAR is telling people they can affort 5-6X their salaries on a home ?
Nope..that is just asking for trouble. Get back to the 2.5-3X range and THEN homes become affordable.

The multiplier is more like about 4.5X.

Here's the problem -- NAR assume that you can spend 25% of your income on a loan for 80% of the principal. So let's do some math.

Suppose a buyer has an income of 100k in NJ (I like round numbers and besides if you make less than that, you're priced out of the market here).

According to NAR, they can spend 25K on their mortgage, or about $1300 per biweekly pay check.

If they max out their 401k, their after-tax biweekly paycheck is about (100 - 15.5) * 0.7 / 365 * 14 or a bit over $2200. So they have $900 left. Take out about $8k a year for property tax, and they're left with $600/month to take care of heating, commuting, auto insurance, home insurance, and perhaps luxuries such as telephone and internet service.

The 2-3X multiplier you use takes all of this into account, whereas the NAR numbers do not.

[boocake]

So have the NAR formulas changed since they first started tracking this stuff? The reason I ask is, even if the formula is faulty, and doesn't REALLY indicate affordability, wouldn't it have been flawed all along? And since we're only comparing this index to itself, in relative terms, isn't it still relevant?

[middle-aged mom]

Originally Posted by Humboldt1

Are prices still dropping in Wheaton and suburban dupage county?

Anyone who bought in or after 2004/5 is challenged to get what they paid, unless they did substantial/meaningful improvements and even then....

A disprortionate number of very high end home sales, in some areas, ( including my own) is misleading.

A significant reduction in inbound relocations by major suburban employers is also contributing to longer market times and falling prices, in areas favored by relocating families.

[elflord1973]

Originally Posted by boocake

So have the NAR formulas changed since they first started tracking this stuff? The reason I ask is, even if the formula is faulty, and doesn't REALLY indicate affordability, wouldn't it have been flawed all along? And since we're only comparing this index to itself, in relative terms, isn't it still relevant?

It's hard to tell, because they only make the data for the last few years available on their website.

It should come as no surprise that housing is more affordable now than in 2006, but I'd like to see their numbers for 2000. I don't see how these could show that housing is more affordable.

I suspect that a part of what makes current prices look affordable is that they take into account lower rates in determining affordability. The problem with this is that they implicitly assume that you pay whatever your initial rate is over the entire life of the loan. This doesn't happen in the real world -- if you take out a loan at a higher rate, you can refinance when rates go down (and on average, loans taken out at higher rates do have a shorter lifetime). Rates were higher in 2000.

Even taking this into account, when I attempt to run their calculation, I get slightly more affordable housing in 2000)

[fairmarketvalue]

Originally Posted by elflord1973

Those numbers are based largely on historical valuation ratios.

That's essentially the "gamblers fallacy" (e.g. that flipping tails increases the probability of flipping a head on the next try)

First, your math is bad. The fall would be 51-44% because the second drop is off the remaining 70%.

Second, if we go by historical valuations, a cumulative drop of 40% is about right, at least in my region (housing prices doubled, incomes went up 20%)

The bubble hasn't burst yet. Real estate prices are slow to correct because sellers don't want to sell for market price. The correction is driven by forced sales and a need to liquidate inventories, but even that is slowed by political measures to rig the market (e.g. foreclosure prevention measures, lower rates, etc). The market won't pick up until the inventories clear out. Rates coming back up again will also push prices further down.

The Case Shiller futures market predicts drops out until late 2010.

Not a thing wrong with my math. Yours, however, could use some work. Lets take a hypothetical: A home in AZ was priced at $1M. It corrected down by 50% to $500k (and yes, this did happen in parts of AZ, CA, NV and FL, the 50% drop, that is!). Now that same home is for sale at $500k, and your saying, it will go another 30%- eventually selling or "fair valued" at $350k? You do the math. I don't know where you get 51-44%. $350k of $1M comes to 65% off of the original 1MIL! OK, then lets take a home in my area- priced at OUR peak at 1M. overall, we've supposedly dropped about 15%, so now that home is currently listed at $750k. Since you generalize, like many, and still think homes are priced 30% over value, that means that same home should be valued at $550k, or 45% off from it's original 1Mil price. So my answer to this, once again, rediculousness is------ NO WAY. You could NOT by all the materials and contents it cost to build the "1M dollar home" in my area, let alone the cost of the land in many "land locked" communities and why many have not even come down to the $750k in many Chicago area suburbs.

So a million goes at different levels, depending on where you are and what that gets you. I guarentee, a mil in the other 4 states I listed above were much more "over inflated" than other areas, therefore leaving it just as innacurate that all homes should and will fall at the same pace/level. Lastly, I used a price of 1Mil so the math could be "simple enough" for you and others to understand. I don't believe, for a minute, that if some states have already seen anywhere from 15-50% off of peak, that they have any further to go. It doesn't mean inventory isn't high, it doesn't mean that sales aren't down, because we all know they are. But none of this absolutely means that if this is the case, that prices are still too high and will come down. And interest rates rising does NOT necessarily mean home prices will lower. It means the "affordability" for each particular buyer will decrease and less home will be able to be bought. That is what higher interest rates will do.

SO, to argue once more of many times, buying now, with interest rates still at "HISTORICAL" lows, will be much smarter than waiting for a declining market that likely won't happen, and weighing all chances to buy as obsolete, because they can't afford the 12% interest rates or "afford" it on a monthly basis. This is what "affordability" is, what a buyer can afford in mortgage payments, not their income/home price ratio. Down payments, interest rates, all factor in these figures and anyone who still attempts to "twist" this as being untrue is in serious denial.

[le roi]

Originally Posted by boocake

So have the NAR formulas changed since they first started tracking this stuff? The reason I ask is, even if the formula is faulty, and doesn't REALLY indicate affordability, wouldn't it have been flawed all along? And since we're only comparing this index to itself, in relative terms, isn't it still relevant?

Think about it this way: in theory, taxes and insurance could go up 1,000%, gas could be $700/gallon, and it might take the average family 30 years to save 20% of the purchase price.... and the NAR affordability index would still chug along as if those crazy things had no impact on home affordability.

In my neck of the woods, over the past 5 years we have had an increase the cost of in property taxes, auto insurance, coastal homeowners insurance (hurricanes), college tuition, gasoline, sales taxes, food, electricity, drinking water, sewer service, stormwater service, state income taxes, et cetera. All the while, incomes haven't gone anywhere. So that leaves less money for the average Wilmingtonian to (a) To save for a downpayment, and (b) To pay for a mortgage with. None of this shows up in the NAR affordability index.

[elflord1973]

Originally Posted by fairmarketvalue

Not a thing wrong with my math. Yours, however, could use some work. Lets take a hypothetical: A home in AZ was priced at $1M. It corrected down by 50% to $500k (and yes, this did happen in parts of AZ, CA, NV and FL, the 50% drop, that is!). Now that same home is for sale at $500k, and your saying, it will go another 30%- eventually selling or "fair valued" at $350k? You do the math. I don't know where you get 51-44%.

If it drops 30% to 700k, then another 20-30% to 490k-560k ( (1-0.3)*700k, (1-0.2)*700k), then that's a 44-51% drop.

The flaw in your math before is that you "added" percentage numbers. Using your previous analysis, two 50% drops equals a 100% drop.

Since you generalize, like many, and still think homes are priced 30% over value,

I didn't do this. I suggested earlier that I'd expect about a 40% cumulative drop (that is, from peak prices). That's closer to 20% or so.

I can't comment on prices in the markets that took much larger hits, I'm not very familiar with them.

you point to "replacement cost" as a valuation metric (e.g. how much does it cost to construct it), and that is one that should be considered, but also taken with a grain of salt in the sense that these building costs were ultimately not sustainable. It's not implausible that some of the "Mc Mansions" would not sell at replacement cost.

Interest rates *do* affect prices, and for a number of reasons, the real estate market *trails* other economic indicators (it partly depends on consumer confidence, price corrections are slowed by political intervention and lack of availability of willing sellers) There is no reason for anyone to "wait" for prices to fall, the current momentum is downward and it will stay downward until there is upward momentum in the real economy.

because they can't afford the 12% interest rates or "afford" it on a monthly basis.

If prices were low and rates were high, I have options to pay off the loan faster; and I have the option to refinance. Purchase price is for ever, not so rates. Average lifetime of a loan at a higher rate is shorter.

This is what "affordability" is, what a buyer can afford in mortgage payments, not their income/home price ratio.

No, it is one affordability metric of many.

[fairmarketvalue]

[quote]

Originally Posted by elflord1973

If it drops 30% to 700k, then another 20-30% to 490k-560k ( (1-0.3)*700k, (1-0.2)*700k), then that's a 44-51% drop.

The flaw in your math before is that you "added" percentage numbers. Using your previous analysis, two 50% drops equals a 100% drop.

You still didn't break it down as it should be. I didn't say 30% off the 1Mil as it's priced TODAY, in an already declined market. And I didn't do 2, 50% drops, at all. I took the original home that is already 50% off from its peak value, just 2+ short years ago, and then another 30% of that current $500k price it's come down to. Now you are suggesting that homes are still priced at peak, ignoring the already HUGE drops in some areas? That 1Mil example is no longer 1Mil, nor has it been. This is the problem, in that many still think homes are priced where they were at peak. They are not, not by any measures! And we haven't even discussed what the "foreclosure" market has done to the value of homes. It's killed certain markets in specific states, while others have been hardly influenced. This is an influence on the RE values, at all national levels. How can anyone deny this? A certain % is reported for predicted price declines and suddenly, it's the figure etched in stone, until one digs deaper to find out why it is NOT etched in stone after all, but meerly sketched on paper, and then erased to see the reality. RE is local, local, local, and while this economy is like no other in even my lifetime, RE is local! Most traditional home owners will cut many things, before "cutting" their home out. That's the most important thing anyone owns, and any homeowner will tell you that. Where are you, by the way, if you want to tell me. Perhaps your in one of the states where 500k gets you nothing. In my area (Chicago suburbs), it gets you a very nice, SF home with a yard and 2-3 car garage. This is why I argue against generalizations.