Housing Affordability Reaches Its Best Levels in Several Generations! | John Burns Real Estate Consulting

Housing Affordability Reaches Its Best Levels in Several Generations!

Since we began tracking the data for the major MSAs in 1981, there has never been a better time to buy a home. The median income household needs only 27% of their income (an all-time low) to qualify for the median-priced home, and that household is also only paying 3.3 times their income for the house (3.1 is the all-time low).

While we acknowledge that there is a tremendous demand/supply imbalance that will probably drive prices lower, long-term-oriented home buyers have the opportunity of a lifetime in most markets around the country. Phoenix is clearly one of those markets. New York clearly is not. Do prospective buyers in most markets really want to gamble that prices AND mortgage rates will be cheaper next year, or can they take a longer term view that it doesn’t get much better than this?

The table below shows a comparison between the current and historical average housing cost/income ratio for the top 20 resale markets in the country. All markets are below the average, with the exception of New York, which is currently at its average, and Seattle, which is slightly above average.

Housing Cost/Income Ratio
Metro Area Current Historical Average
New York, NY-NJ (MDiv) 64% 64%
Los Angeles, CA (MDiv) 45% 59%
Seattle, WA (MDiv) 40% 39%
Chicago, IL (MDiv) 29% 35%
Orlando, FL 27% 31%
Raleigh-Cary, NC 26% 33%
Riverside-San Bern., CA 26% 39%
Austin, TX 25% 33%
Washington D.C.(MDiv) 25% 33%
San Antonio, TX 24% 30%
Las Vegas, NV 24% 36%
Nashville, TN 23% 29%
Tampa, FL 22% 30%
Charlotte, NC-SC 20% 32%
Denver, CO 20% 33%
Phoenix, AZ 20% 33%
Dallas, TX (MDiv) 19% 30%
Houston, TX 19% 27%
Atlanta, GA 19% 27%
Fort Worth, TX (MDiv) 15% 21%
Top 20 Average 27% 35%

Economic Growth…………………………………………………………………..D
Real GDP fell to an annual rate of -6.2%, which was the most significant decline since mid-1980. The employment sector is also quickly deteriorating, losing 4.3 million jobs in the last year. The 3.1% year-over-year decline in employment is the largest in 50 years. The headline unemployment rate has increased to 8.1%, reaching its highest level since 1983, and the real unemployment rate is 14.8% (including part-time workers looking for full-time work). Mass layoff events – job cuts of more than 50 jobs – have risen 51% in the last year. Inflation continues to decline, with the Full CPI now at 0% and the Core CPI (all items less food and energy) reaching 1.7%.

Leading Indicators………………………………………………………………..D-
The leading indicators declined further this month, pointing to an extended period of economic weakness in the near future. In February, stocks generally experienced double-digit percentage declines compared to January and resulted in year-over-year losses of between 39-45% for each of the four major stock indices we track. Homebuilder stocks were once again battered, declining 49% year-over-year. The price of crude oil has fallen quickly since September, and that trend continued in February as the average price per barrel reached just $39.16 in February. Adjusted for inflation, oil prices are back to early 2004 levels. The Leading Economic Index improved slightly from the previous month, but the negative growth rate of -3.3% suggests further weakness in the economy for the near-term. Despite the small uptick in January’s value of the Purchasing Managers Index, it remains near its lowest point since the early 1980s, indicating continued contraction in both the manufacturing sector and overall economy.

Affordability continues to quickly improve due to declining home values and falling mortgage rates. However, strict lending standards, job loss fears and fear of further declining home values have kept many potential buyers on the fence. Mortgage rates continue to fall, reaching their lowest level in nearly 40 years. The 30-year fixed mortgage rate was at 5.07% at February month-end. The Fed’s overnight lending target rate remains at a range of 0.00% to 0.25%, which is the lowest level on record, with the intention of kick-starting the economy and battling deflation. The Mortgage Bankers Association reported a slight increase in the share of ARM applications, which reached 2.4% in the last week of February, but is still extremely low when compared to peak levels above 35% of total loans in early 2005.

Consumer Behavior…………………………………………………………………D-
Consumer confidence continues to weigh heavily on the economy. The Conference Board’s consumer confidence index – currently at just 25.0 – reached its lowest level in the 41-year history of the index. The Consumer Sentiment Index also declined in February, yet the Consumer Comfort Index increased slightly this month. As consumers cut back on spending, the personal savings rate continues to improve, gaining 5.0% year-over-year for a total of $546 billion in savings.

Existing Home Market……………………………………………………………..D
The existing home market remains weak due to steep price declines and weak sales volume. The median price in the resale market has fallen nearly 15% year-over-year to $170,300, according to the National Association of Realtors (NAR), while the Case-Shiller index shows an annual decline in paired sales of more than 18%. The annualized existing home sales volume declined to 4.5 million transactions in January, down from 4.7 million in December, and down 8.6% year-over-year, according to the NAR. The volume of pending home sales declined sharply in January, and is now 6% lower than one year ago, which suggests sluggish sales activity for the near future. The supply of unsold homes increased slightly to 9.6 months of inventory, which remains high compared to history.

New Home Market………………………………………………………………….F
The new home market continued to show signs of weakness in the past month. Builder confidence increased slightly this month, yet remains near historical lows, as the Housing Market Index increased to a value of 9. The median new home price fell in January and is now down 13.5% year-over-year, equal to $201,100, according to the Census Bureau. The annualized new home sales volume also fell sharply in January to 309,000 transactions, declining 48% year-over-year, and reaching the lowest level since the Census began tracking this data in 1963. While the absolute volume of unsold new homes continued to decline, falling sales activity pushed the months of supply to more than 13 months.

Housing Supply…………………………………………………………………..F
The overall supply of new housing diminished across the board, from permits to starts to completions, continuing to push housing supply to extremely low levels. The annual volume of new home completions fell to 1,015,000 units, which was down 24% year-over-year. Both single-family and multifamily starts declined, pushing total starts down to 466,000 units. Single-family permits declined, and multifamily increased slightly, resulting in a nearly 51% year-over-year drop in total permit activity. The homeowner vacancy rate increased slightly in the fourth quarter to 2.9% – matching a record-high level.

Data Current Through February 28, 2009
Overall Grade
Economic Growth
These are the best indicators of how the economy is currently performing.
Real GDP (annual rate) -6.2% D-
Employment Growth (1-year Change)
– Non-ag Payroll, NSA -4,257,000 D
Employment Growth Rate
– Non-ag Payroll, NSA -3.1% D
Unemployment Rate 8.1% D
Mass Layoff Events, SA (YOY % Change) 50.9% D+
Productivity 3.2% C
Retail Sales -8.6% F
Core CPI 1.7% B+
Full CPI 0.0% C+
Personal Income Growth, nominal 1.9% F
Federal Deficit (last 12 mos., $mil curr.) -$940,789 F
Total Households 111,854,000
Owned Households 75,508,000
Rented Households 36,346,000
Leading Indicators
These have all proven to be predictable early indicators of the direction of economic growth.
Leading Econ. Index (Ann. Growth Rate Last 6 Mos.) -3.3% D+
ECRI Leading Index -24.1% F
Manpower Net Employment Outlook 10% D-
Corporate Profit Growth (pre-tax) -9.2% D
Residential Investment as % of GDP (nominal) 3.1% F
Interest Rate Spread
10-year Treasury 2.91%
2-year Treasury 1.03%
Interest Rate Spread 1.88% B
3-month LIBOR 1.24%
3-month Treasury 0.30%
TED Spread 0.94% C-
Stock Market (Return over last 12 months)
Dow Jones -42% D-
S&P 500 -45% F
Wilshire 5000 -44% F
S&P Super Homebuilding -49% F
Crude Oil Price (Current $) $39.16 C
ISM Manufacturing Index 35.8 F
ISM Non-Manufacturing Business Activity Index 40.2 F
These statistics are probably the most important indicators of short-term housing market performance.
Conforming Mortgage Rates (contract rate; an additional 0.6 – 1.0 points are also paid up front by the borrower)
Housing Cycle Barometer 0.0 A+
Mortgage Rates, Fixed 5.07% A+
Mortgage Rates, Adjustable 4.81% B
Fixed/Adjustable Spread 0.26% F
Fixed/10-year Spread 2.16% C
Fed Funds Rate 0.13%
Percentage of Adjust. Loans 1.9% A+
Equity/Owned Home (Current $) $104,375 C
Debt % in Home (LTV) 57.0% F
Median Household Income $50,233
– Growth Rate, nominal 4.2% C-
Revolving Cons. Credit per Household $8,136
– Growth Rate 1.5% A-
Consumer Behavior
Consumer attitudes correlate well with short-term housing sales performance. Consumer income growth, debt levels and job prospects affect the long-term outlook for housing sales.
Consumer Confidence Index 25.0 F
Consumer Sentiment Index 56.3 F
Consumer Comfort Index -50.5 F
Personal Savings Rate 5.0% C-
U.S. Net Worth Growth Rate -17.9% F
Misery Index (Unemployment + Inflation) 7.60 B-
Existing Home Market
Sales volumes correlate well with the Housing Cycle calculations, and boost the trade up New Home sales market.
S&P/Case-Shiller® U.S. Price Index (YOY % Change) -18.2% F
NAR Single-Family Median Home Price $170,300
NAR Single-Family Annual Price Appreciation -14.8% F
Freddie Mac Annual Price Appreciation -6.0% F
Annual Sales Volume, SA 4,490,000 C+
Existing Home Inventory for Sale, SA 3,600,000 D
Months Supply of Unsold Homes, SA 9.6 D+
Purchase Mort. App. Index, SA 250.5 C
Pending Home Sales Index, SA 80.4 F
Homeownership Rate 67.5% B
New Home Market
High appreciation and low inventory would mean an excellent short-term outlook for the new home industry.
Housing Market Index 9 F
Multifamily Condo Market Index 8 F
Median Price, NSA $201,100
Annual Appreciation Rate -13.5% F
Constant Quality Price Index (YOY % Change) -5.7% F
Sales Volume, SA 309,000 F
New Home Inventory for Sale, NSA 341,000 C
Months Supply of Unsold Homes, SA 13.3 F
Months of Homes Completed, SA 6.5 F
Months of Homes Under Const., SA 5.1 D-
Months of Homes Not Started, SA 1.7 F
Housing Supply
High construction levels are good for the economy. However, if new supply exceeds demand, prices could fall.
New Housing Units Completed, SA 776,000 F
Single-Family Starts, SA 347,000 F
Multifamily Starts, SA 119,000 F
Total Starts, SA 466,000 F
Single-Family Permits, SA 335,000 F
Multifamily Permits, SA 186,000 F
Total Permits, SA 521,000 F
Manuf. Housing Placements, SA 64,000 F
Total Supply, SA 585,000 F
Total Housing Stock 130,840,000
Homeowner Vacancy Rate 2.9% F
SA stands for Seasonally Adjusted Annual Rate. NSA stands for Not Seasonally Adjusted.
* The best 15% ever are “A” scores, the average is a “C”, and the worst 15% ever are “F” scores, with distributions throughout.


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