From USA Today, today:

More Americans found housing unaffordable last year, even though home prices across the U.S. have taken a major fall. More than 40 million spent 30% or more of their household income on housing costs, 600,000 more than in 2007, according to 2008 Census data released Monday. That includes homeowners with and without mortgages, as well as renters.

USA Today has important data here, and it supports a point we've been pounding on here at the Implode-o-Meter for over a year: the declines in nominal home prices to date do not in themselves guarantee affordability, nor are they likely to in a general "credit crunch" environment.

That is, while nominal prices may have gone down significantly, the median home buyer (or potential home buyer) faces higher financing costs, and thus monthly payments are unchanged or rising, or at least, constitute a higher percentage of income. Many trends factor into this: the loss of exotic financing options, stricter qualification in general, lower credit scores and income curtailment and job loss.

Thus, we should not pat ourselves on the back too early regarding home prices: affordability is what drives prices, so all the above implies that they have significantly farther to fall.

This in turn has other "recovery" party-crashing implications, for example, that much of the market's current resilience (if you could call it that) depends on FHA and GSE propping from the government, as well as ad hoc stimulus measures like the $8000 first-time buyer tax credit. In other words, unsustainable, if not exotic, financing substitutes for the private market have been keeping things going. Since prices will still inevitably head down based on fundamentals, that means two things: (1) many buyers who have taken advantage of these recent supports will be even more exposed to negative equity and default, and (2) the decline threatens to be even more furious when the fumes of government stimulus wear off.

As a final note, this is yet another area where the "deflation" analysis leaves much to be desired. If we were in a true monetary deflation, expenses and costs would be going down for the median homebuyer and renter, not up. Instead what we are experiencing is a credit contraction and financial panic over top of an inflationary backdrop, presenting the worst of both worlds to consumers. This latest data corroborates that stance.


tvsterling at 08:22 2009-09-23 said:
Is It Just Me Or What? Here we have a glut of housing units nationwide & these housing costs are over the moon. This presents a funny picture. Is it a case of the banks still refusing to get real about the a$$ets the houses represent? Has anyone ever told them about half a loaf being better than none? I would be inclined to rent out whatever I could just to keep it occupied & protected. And at an attractive price too, And with a free, honest, reasonable purchase option for when times get better. Of course who can know what a greedy jerk banker is thinking. That is if they know how to think at all. Permalink

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