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Archive for the ‘Housing Prices’ Category

The Index of pending home sales fell a record 30% in May to a record-low reading of 77.6 — two hugely pessimistic predictors of future prices nationwide. Yet the combination of two record negatives went barely reported when the stats were announced last week.

So here’s the news for you now, a week late, but new to the marketplace of ideas. Pending-home sales have crashed and now stand below the worst numbers we have seen since the housing crash started in 2006. The rubber bands and duct tape are breaking apart in the property market. Presume the fix of a fall is in.

Take a look at the three charts below. Judge for yourself how important the facts are which the National Association of Realtors (NAR) announced last Thursday (July 1). I personally find them startling, alarming, critical to review.

The oversight by major news outlets — snubbing record negatives — is egregious by virtue of its ignorance of the expiration of the free-down-payment program. The pending-home-sales stat gave us our first view of buyer demand for housing without the hugely popular prop from the federal government.

I am not saying here that the news was buried. I am saying that reporters failed to do the most basic leg work. Even those who lucked out and stumbled upon the record stats, they failed to comprehend the importance of the new data. I would have missed it too if I hadn’t charted the numbers myself, but I did, so I didn’t miss it.

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Speculation has run rampant as commentators have wondered about the direction of prices as government support starts to fall away.

The future direction of real estate prices is a major obsession of almost all economy watchers as the monthly bill for shelter overshadows others, as the value of homes is a predominant factor of family wealth, and because the banking sector has huge investments based upon residential property.

“If you’re looking for a silver lining in housing, you aren’t going to find it here,” Mike Larson of Weiss Research said. “Demand has fallen off a cliff in the wake of the tax credit expiration, with pending sales falling by the biggest margin ever to the lowest level ever.”

Mr. Larson’s comment drew attention to the two new record lows. His name is on every story that mentioned one or both record stats. Had he remained silent, these highly relevant record lows would have gone unreported completely.

Of the 15 major media outlets i reviewed, four actually did learn about both of the record negatives, but they didn’t understand the meaning of it.

The statement by NAR announcing pending-home sales makes no reference to either the record fall or the record new low. If their intention was to hide bad news, they got away with murder. Let’s show you the fools who fell for it.

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Among the outlets who failed to uncover either of the two record negative stats are Barrons, Dow Jones, The Financial Times, Fox Business, The Los Angeles Times, and Marketwatch.

I reviewed stories on pending-home sales by 15 leading news outlets – in addition to the flunking students mentioned immediately above, I also read Atlaticwire.com, BBC News, Bloomberg, Boston.com, CNBC, Investors’ Business Daily, New York Times, Reuters, US News — and the only difference between the outlets was the extent to which they screwed up this critical epicenter-type data set (Please see the graphic nearby depicting the various degrees of incompetence.).

The future direction of housing prices are arguably the most critical factor in the most critical nation in the most critical financial crisis since the Great Depression. The signs are not hunky-dory in this market. The May pending-sale figures may in retrospect serve as a Rosetta Stone: A perfect guide to the true fortunes of residential real estate. Just in case you have forgotten, we are in one hell of a market, and Mom did not tell us this is what would happen when we grow up.

*** HousingStory.net estimates current inventory for sale of 3.9 million is 1.2 million units higher than it should be, and not too far away from the record high 4.5 million. Inventory stands at 8.3 months of sales, but it should be at 5.8 months.

 Fourteen percent of mortgages are behind on payments — about 7.7 million borrowers or, more starkly, one in seven. A record 4.63 percent of borrowers are in foreclosure. Approximately 13 million homeowners have no equity or negative equity. They would make nothing from the sale of their house if they could sell it. Or they would lose a little or a lot. Thus do we have the phenomena of strategic default — now as common as no-money-down mortgages during the boom.

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 We are in a pause of a tectonic shift of plates. Prices have been flat since August 2009, but are down 30% from their peak. The fall of 30% was almost completely discounted as impossible prior to its occurrence.

 My speculation is that the fate of bubble-mortgage debt remains as our key obstacle blocking recovery (Unbelievers should rent the Godzilla movie “Eating the Lost Decades of Japan” for further enlightenment.). Total mortgage balances remain almost unchanged from the peak of the bubble –$11.68 trillion today versus $11.95 trillion at the peak (see chart below).

The data released last week on pending home sales and the dismal record of reporting on that data proves that breaking news business journalism fails even in surface scratching. The cows just want to feed on the grass in front of them and go on to the next field. 

The smart investor is going to look at these charts on pending-home sales and have a real advantage over the common media consumer. Readers of my work know I have found pessimistic facts easy to find. The pending-sales figures are a dramatic concurrence — a record fall and a record low. 

So I will give you my opinion: All hell has broken loose all over again in real estate. Don’t buy a home. Sell one. 

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The press release by NAR on pending-home sales. The Fifteen Stories by Major Media Reviewed on Pending Home Sales. 

Thank you for carrying the story to Automatic Earth, Business Insider, Implode, Jesse’s Cafe Americain, MortgageNewsClips.com, Patrick.net. Housing Story

By Dylan Ratigan

The dire straits of the middle class of America has made it near impossible for our politicians to keep up the pretense that our current government truly works for the “people.” Between the multiple overt and secretive bailouts, the massive bonuses and the circular use of our tax money to lobby for these continued handouts, you can no longer hide from the evidence.

When Senator Durbin said “The banks… frankly own this place,” you realize it was not in jest.

Couple this with recent protections handed by the Supreme Court to corporations to directly influence elections and it can make things seem hopeless for those not on Wall Street or their chosen politicians. Favored CEOs and now even foreign countries get all the printed money they need, leaving us paying both our bills and theirs.

And now nearly a quarter of all Americans are currently underwater in their mortgage because of that steadfast honor.

If you are one of them, chances are you didn’t do anything wrong. Almost all of you were not subprime borrowers or speculators, but merely people buying a house that they thought they could afford at the time. You were just unlucky in that you bought a house during a time when an outdated Wall Street and their complicit politicians decided to use housing to regain the income they lost due to the Schwabs and Etrades of the internet age.

You didn’t cause this mess. They did.

Now you are struggling to make the same payments on this mortgage on your now overpriced home even in light of a crashing economy and massive deflation, all while the government does everything in its power to help Wall St. keep the bonuses coming.

Well, it is becoming time to take matters into your own hands… I suggest that you call your lender and tell them if they don’t lower you mortgage by at least 20%, you are walking away. And if they don’t agree, you need to consider walking away.

It probably doesn’t feel right to you.

That is because you probably are a good person. But your mortgage is a business deal, and it is not immoral to walk away from a business deal unless you went in to the deal with the intention of defaulting.

But somehow, even though the corporations are pumped to exercise their new rights, former bankers like Henry Paulson, current ones like Jamie Dimon and — get this — now even Fannie Mae execs want to keep you from exercising your rights.

But before you let them (or anyone commenting below) force you into paying that $500k mortgage on a $300k house, ask them if they’ll push Jerry Speyer into “honoring his obligation” by breaking into his $2 billion personal piggy-bank to keep paying for Stuyvesant Town?

Or how about asking Hank and Jamie to lecture fellow bailed-out CEO John Mack about how “you’re supposed to meet your obligations, not run from them”? Maybe make him use some of his $50+ million for those buildings he bought in San Francisco?

And before shaming and punishing American homeowners, did they nag Steve Feinberg about helping “teach the American people…not to run away” by writing a check out of his billion-dollar pocket to cover all the stiffed landlords and vendors at Mervyn’s? After all, at least you aren’t single-handedly putting 1,100 employees out of work when you walk on your mortgage.

As part of the deal for your house, your mortgage holder gets interest payments from you and they also use the note to your house for their capital reserves. In return, they take the risk of a foreclosure. In many states, you paid extra to have a non-recourse loan where the lender just gets the house back if you stop paying — your interest rate would’ve been much lower if you were held personally liable like a student loan. But if you still feel bad, then donate the money saved to charity instead of to their bonuses. And when someone tries telling you why it is so wrong, here are some answers:

- Yes, it might seem selfish, but you are actually going to help fix our country the right way, through the use of pure capitalism. There are 3 parties involved in your mortgage — the mortgage holders, the servicing bank and you. You probably want to stay in your house. Most of the people who actually own your mortgage also want you to stay in your house, preferring a mortgage reduction that you keep paying instead of the total loss of a foreclosure. But the major banks (BofA, Wells Fargo, JP Morgan, Citi, etc.) that underwrite and service the loans don’t care about either of you. They (with the aid of their government) just care about hiding their true financial condition for long as possible so they can continue to bonus themselves outrageously. The credible threat of you walking away from your mortgage en masse is the only market-based solution that will force these banks to work with the mortgage holders on your behalf.

- No, you will not “hurt” your neighbors — certainly not near the scale of the banksters. Chances are someone just as nice will you will move in and (unlike you) pay a fair, non-inflated price for the house. Encourage your neighbors to fight back against the banks and ask for their own mortgage reductions as well.

- Yes, it might make getting a loan harder for everyone. Considering the spate 0% down NINJA loans over the past decade, that probably isn’t a bad thing.

- Yes, it might hurt your credit. But with time, people bounce back from having foreclosures on their record. Search online and then talk to a lawyer about the repercussions, which vary by state.

- No, the banks won’t necessarily pass the losses on to customers. They already make a lot of money. If costs are passed on to every consumer without banks competing on price, that’s a sign of illegal collusion or a monopoly. Let’s fix that instead of just letting banks ruin our lives. They might, however, not all make $145 billion in bonuses next year doing something fundamentally so easy that it is an unpaid job in Monopoly.

Meanwhile, our captured government has made it clear that they want to further reward these banksters because there are clearly better ways to “save” the economy without rewarding those most responsible for the damage.

Instead of claw backs for the past theft and strong financial reform for the future, they choose to cover-up the gross misuse of our tax money, making our country worse by helping the criminals on the backs of the most honest.

But thankfully, in this country we still have the tools to fight back and regain our country. Our vote, our voice, our laws and what we choose to do with every penny we have that doesn’t go to taxes are the benefits of our hard-fought freedom, and in this battle we must use them all to fight back. It’s time for the citizens to once again own this place.

ZeroHedge

Over a third of HAMP participants have exited the program and another batch is coming up. Those leaving the program will likely end up in foreclosure. Moreover, 4 million delinquent borrowers are not even eligible for the program.

Please consider Borrowers exit troubled Obama mortgage program.

The Obama administration’s flagship effort to help people in danger of losing their homes is falling flat.

More than a third of the 1.24 million borrowers who have enrolled in the $75 billion mortgage modification program have dropped out. That’s more than the 27 percent who have managed to have their loan payments reduced to help them keep their homes.

Last month alone, 150,000 borrowers left the program — bringing the total to 436,000 who have exited since it began in March 2009. A major reason so many have fallen out of the program is the Obama administration initially pressured banks to sign up borrowers without insisting first on proof of their income. When banks later moved to collect the information, many troubled homeowners were disqualified or dropped out.

“The majority of these modifications aren’t going to be successful,” said Wayne Yamano, vice president of John Burns Real Estate Consulting, a research firm in Irvine, Calif. “Even after the permanent modification, you’re still looking at a very high debt burden.”

HAMP Performance Report Through May 2010

Here are a couple of charts from the Making Home Affordable Program Servicer Performance Report Through May 2010.

Hamp Trials Started

Permanent Modifications

Waterfall of HAMP-Eligible Borrowers

Not all 60-day delinquent loans are eligible for HAMP. Other characteristics may preclude borrower eligibility. Based on the estimates, of the 5.7 million borrowers who were 60 days delinquent in the 1st quarter of 2010, 1.7 million borrowers are eligible for HAMP. As this represents a point-in-time snapshot of the delinquency population and estimated HAMP eligibility, we expect that more borrowers will become eligible for HAMP from now through 2012.

Only 30% of the 5.7 million borrowers who are 60 days delinquent are eligible for the program. 4 million delinquent borrowers are stuck. Of those eligible for the program, only 346,000 have completed the trial and received a permanent modification.

Many of those receiving a permanent modification will slip back into default and head for foreclosure. Many of those who successfully keep their house would be better off if they lost it.

Looking at HAMP from every angle, it’s safe to say the program was a failure and another huge wave of foreclosures is coming down the road.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Why buying a home today makes little financial sense. 3 reasons why taking on a mortgage in today’s market is deep in speculation. Are homes still over valued? Tax benefit not as big as you would expect.

Posted by mybudget360

It is hard for many to believe that home prices in many of our largest cities are still overvalued.  Part of this distortion has to come from living in a decade long housing bubble that has adjusted the perception of value and price.  But in many areas home prices are still much too high relative to the income of local families.  When disconnects occur here, bubbles are produced.  The stock market is experiencing this since price to earnings ratios are still much too high for what businesses are drawing in through revenues.  The housing market is off by 30 percent from its 2006 peak and weakness is now appearing once again now that the tax credit has expired and the Federal Reserve is finished with their mortgage backed security buying campaign.  It only took a few weeks once artificial measures were taken off the table.

Home prices relative to income are still too high nationwide:

Source:  Visual Economics

In fact, if we look at recent data the numbers are still too high:

Median Household income:       $52,029

Median U.S. home price:             $173,100

Yet on a nationwide basis, we are getting closer to the ratio of the 1970s.  But on a more narrow level of cities and states, some areas are still very much in bubbles including California.  It is a fascinating case of consumer behavior post-housing bubble.  Since most of us have now been conditioned over the past decade that the only way to buy a home is to take out an enormous mortgage and leverage each penny of net income to a home payment, we have forgotten sounder times.  In light of this, it might appear that home prices make more financial sense in today’s climate but they do not in many areas.  Let us look at a few reasons why buying a home today is not a good idea.

Reason #1 – Smaller mortgage with higher interest rate better than big mortgage with small interest rate

One argument you hear those in the housing industry continually make is “you should buy today because rates will rise.”  What they don’t tell you is that higher rates usually mean cheaper home prices and buying a less expensive home with a smaller mortgage and higher interest rate makes much more sense than buying an expensive home with a big mortgage and cheap interest rate.  Before we walk through an example, let us look at historical mortgage rates:

Over 40 years of history shows an average 30 year mortgage rate of 9 percent.  The current average that is lower than 5 percent is an anomaly.  If we run a few scenarios, you will see that a cheap mortgage rate and an expensive home actually give buyers less power when it comes to paying down their mortgage.

We’ll run two scenarios with the current interest rate and the average to show why this occurs.  We’ll assume a same monthly payment since this is usually what is used for debt-to-income qualifications so the home price will reflect this.

Low interest rate scenario – 5% 30 year fixed

Home price:                       $250,000

30 year mortgage:           $237,500 (using a 5% down payment)

Monthly principal and interest:                  $1,274

Total interest over life of loan:                   $221,482

High interest rate scenario – 9% 30 year fixed

Home price:                       $165,000

30 year mortgage:           $156,750 (using 5% down payment)

Monthly principal and interest:                  $1,261

Total interest over life of loan:                   $297,298

On the surface, this appears to be a good deal.  By paying more with a lower rate you have more flexibility.  But let us assume this family is able to contribute $300 more per month.  What happens then?

Low interest rate scenario $300 additional monthly payment (239 payments – 19 years)

Total interest over life of loan:   $137,388

High interest rate scenario $300 additional monthly payment  (188 payments – 15 years)

Total interest over life of loan:   $135,437

Here is the big difference.  With $300 more per month, the person with the high interest rate can pay off their loan 4 years faster and save on their interest payments as well.  This is the leverage of having a higher interest rate and a lower priced home.  Also, the requirement for down payments is shifted lower since the price is moved lower.  This is good if the person ever decides to sell their home in the future because more people can qualify for the home.  The heavily exotic mortgage market simply caters to the idea that home price is the most important factor in housing.  It is not.  Affordability is the most important factor for long-term sustainability.

Tax benefits over sold?

One of the oddest pitches about buying a home is the tax deduction.  The fact of the matter is, most homeowners live in cheap enough housing that the standard deduction is all that is needed without the mortgage interest deduction being taken.  In fact, only a handful of states like California benefit from this tax deduction even though most think this helps them (probably from not understanding the complicated tax system).  To be honest, the mortgage interest break actually helps out the wealthiest in our country.

“(Tax Foundation) For tax year 2008, a little over one quarter of the nation’s tax returns claimed the mortgage interest deduction, 26.8 percent of the nation’s 143 million tax returns. Rates of home ownership are much higher than this, but many home owners don’t claim the deduction. Often they live in low-cost homes for which the deduction isn’t large enough to make a tax difference, so they don’t itemize deductions on their tax returns. In addition, home owners who have paid off their mortgages make no interest payments to deduct.

The average tax return in the U.S. deducted $3,279 in mortgage interest; that includes all tax returns, even the non-homeowners and non-itemizers. Counting only the tax returns that deducted mortgage interest, the average amount was $12,221.”

This is a stunning revelation.  The homeownership rate is approximately 67% but only 26.8% claimed the mortgage interest deduction.  So much for that sacred cow of housing right?

Reason #2 – Price to earning potential of home is still unsupported by long-term trend

Home prices in many cities are still in mini-bubbles relative to the income of families in those areas.  California is a prime example:

According to the California Association of Realtors the median home price in California is $306,000.  However the median household income is $60,000.  This means the home price is 5 times the annual household income of a family in the state.  Take for example the following:

Median household income:

1969:     $9,302

2008:     $57,000

California median home price:

1969:     $24,640

2008:     $500,000

So back in 1969, the ratio was 2.6 and at the peak it was close to 10.  Today even at 5, it may appear to be lower relative to the peak but it is still too high.  Expect this ratio to come back in line in the 3 to 4 range.  This has historically been the case for most areas across the United States.  Many states are actually back in line but many cities still think they are somehow immune to this trend.

Reason #3 – Mortgage rates will go up

The U.S. Treasury and Federal Reserve have been systematically pushing mortgage rates lower.  For example, the Federal Reserve just finished buying up $1.25 trillion in mortgage backed securities.  The Fed balance sheet is already overfilling with mortgage backed securities, loans taken from banks, and other items which never were intended to fall under their prevue:

Source:  Zero Hedge

This is not normal.  Historically we have never been in a position like this.  It is unwise to think that mortgage rates will stay low for an indefinite amount of time.  Already the credit markets are starting to push rates higher because of the risk inherent in the current debt riddled system.  Buying today assumes and is a bet that we can go into trillions of dollars of debt with no interest rate repercussions.  This is a giant gamble and the markets are acting like a volatile casino.

To buy today is a big bet.  There is too much that makes this market volatile.  Aside from the above, there is also a large amount of shadow inventory which will keep a lid on price appreciation for years to come.  Betting on housing today is probably the biggest gamble many will make.

Home Builder Displays Vacuum In Brain

Posted by Karl Denninger

Hattip to the forum for the pointer to this one….  yes, I know the original post was written in 2008.  It’s still relevant, and should be required reading to understand exactly how screwed people’s opinions in the “homebuilding” space are.

As a Builder, I am extremely interested in the current debate about the home building and mortgage finance industry.  One comment I have heard repeatedly over the past several weeks is the need to return to “sound mortgage standards” based on home values of 2.5 to 3 times income, 30 year fixed rate mortgages at 80% loan-to-value and a 20% down payment.  But just how realistic is this?

Ah, the old “let’s appeal to what people deserve” game.

According to the U. S. Department of Housing and Urban Development, the median household income in the U.S. in 2007 was $59,000. If we return to sound mortgage standards, median home values would have to be $147,500 (2.5x) to $177,000 (3x).

So under “sound mortgage standards,” a household earning the median income would have to save $29,500 (2.5x) to $35,400 (3x) – 50% to 58.5% of their annual household income – for their down payment before they could purchase a home. Is this realistic?

“Realistic” (as defined by “what someone deserves”) is irrelevant.  What matters is mathematics.  You know, that ugly science that says that some things you want are just not achievable?  Yes, that.

According to the U.S. Census Bureau, the median home price in the U.S. is $231,000, so median home prices would have to drop 37% to 48%. Is this realistic? Even those homeowners who purchased their homes using “sound mortgage standards” would owe more than their home is worth.

You helped create a massive bubble and support the mispricing of the homes in that bubble, and thus YOU are partly responsible for the above condition.

Now you wish to argue that it shouldn’t exist, because, well, people “deserve” something better.  Wish in one hand and wipe your butt with the other; it won’t change what’s in or on either.

As a Builder, I would love to be able to build and sell new homes for under $148,000.  But is that realistic?

According to the National Association of Home Builders Economics Department Construction Cost Survey, the average new home built in the U.S. in 2007 was 3,340 sq.ft, was built on an 11,968 sq.ft. lot, and had a total sales price of $454,906.

According to the NAHB the “average” new home built in 2007 was nearly three times the size of the one I grew up in and was built on a lot that was ten times the square footage of that same home.

Oh, and by the way, my family was decidedly middle-class.  My father was a CPA for a glass company.  Not exactly a “pedestrian” or “lower blue collar” income.  Both he and my mother have college degrees; his in accounting, hers in education.  She decided to stay home and raise a family, he went to work every day, driving 25 miles one way to do so.

We had three bedrooms for four of us (the adults obviously shared), one bathroom that had a toilet, a tub and two sinks, a living room and an eat-in kitchen.  One story with an unfinished basement (containing the laundry gear, furnace, hot water heater and electrical panels); that’s it.

No air conditioning, one telephone on the wall, one black-and-white TV (we couldn’t afford color) which sported rabbit ears and, later in my youth, I helped my father install on the chimney an external antenna with a rotator.

According to the Idaho Department of Labor 2007 Occupational Employment and Wage Report, the median hourly wage for construction trades workers in the Boise City – Nampa MSA $13.85 plus 21% for payroll taxes and insurance equals $16.75 per hour.

That’s funny.  I remember quite vividly that the glaziers in the shop my father worked at were union boys and earned about $31/hour gross – that is, before payroll and other taxes and such, and of course before overtime.  This, I will remind you by the way, was in the 1970s.  So if the actual cost of “labor” in Boise City is $16.75, I’d say you’re getting a hell of a deal, inflation considered and all.

In conclusion, how realistic would it be to return to “sound mortgage standards” based on home values of 2.5 to 3 times income, 30 year fixed rate mortgages at 80% loan-to-value and a 20% down payment? Not very. Doing so would certainly change the home building industry which historically accounts for 10% to 15% of the gross domestic product of the U.S.  We would build fewer new homes and the ones we do build would be much smaller homes on much smaller lots.  And home buyers would certainly have to adjust their expectations.

Maybe I should start building apartments

Maybe you should pull your head out of a place the sun does not shine and take responsibility for helping to bankrupt this nation.

You, and those like you, have led people to believe they can have something for nothing.  That they can violate the laws of mathematics with impunity and never pay for it. 

You are just like my father, who, after he retired, decided he would “get his” and thus supported (strongly) Medicare Part “D” – despite full and certain knowledge, since he’s a CPA and understands compound interest, that it would be impossible to sustain the program on an indefinite forward basis and HIS GRANDDAUGHTER would INEVITABLY get screwed as a consequence.

I don’t really give a good damn what you think you should be able to build and what people should be able to have.  It’s not relevant.

What’s relevant is the mathematics of leverage and compound interest.  These are mathematical laws, not suggestions.  Violating them with wild abandon and willful intent is why the nation is in the mess it finds itself in now.

May I remind you that of those who have completed “HAMP” modifications find themselves with DTIs – that is, mandatory debt service payments – over 60% of their pre-tax income.  If you then add into that things like automobile insurance, medical insurance and bills, fuel for said vehicle, utilities for the home, food and similar necessities both to live and continue to be able to earn an income, along with taxes (yes Matilda, everyone pays FICA and Medicare irrespective of income) you find that this so-called “beneficiary” of your profligate pumping of “home values” finds himself eating dogfood and being a literal leaking water heater away from family bankruptcy.

I simply don’t care if people are unrealistic about land values – that will change out of necessity, irrespective of what those people – or you – might want.

But to claim that the “average” family should be buying a 3,000 square foot house is simply outrageous.  It speaks directly to the idiocy of “pump it up” finance and ridiculous and outrageous statements from people like Chuck.  “We all are owed McMansions and by God, we’re gonna have ‘em – whether we can pay for them or not!”

Yes, that posting was from 2008.  But Chuck hasn’t stopped.  No, just a few months ago he’s played “buy now or be priced out forever!” once again, citing, of course, the earthquake in Chile:

Are you waiting for the price of that new home you’d like to build to drop further?  I wouldn’t.

That was copper, remember, along with oil (which goes into a lot of things, like, for example, asphalt shingles)

How’s that worked out the last few months?

It was “going to the mooooooon!” through 09 remember?  Now, not so much:

And oil?  Remember, Goldman (and others) told us it was going well over $100 soon (again.)  Yes, I noted that it might, on a technical basis.  Well, so much for that:

This looks more like “don’t be a sucker and buy into the hype” to me than “buy now or be priced out forever!”, when one looks at the issues analytically.

Make good choices folks, and kick to the curb the asshats who have, for the last two+ years, tried to goad you into doing something that will leave your bereft of your labor and accumulated wealth.

A “nice big house” isn’t yours unless it’s paid for – if you have a big fat mortgage on it the bank owns it and your future labor.  You in fact own nothing other than debt.

Don’t let Chuckie talk to you into doing something stupid – when homes are 2-3x average incomes and you have saved that 20% down payment, then and only then do they make a moderate amount of sense to buy – and then as a place to live, not as an “investment” that you expect to appreciate in value.

Remember, Chuckie’s certifications (self-claimed, I’m not making this up) include Certified New Homes SALES Professional and Certified New Home MARKETING Professional.

That is, he’s certified in the art of separating you from your money by selling you something. 

That, incidentally, just might be adverse to your interests.

Buying a Home in America today is Expensive Thanks to the Banking Sector: Examining Income and Home Prices from 1950 to the Present. Can Home Prices Fall Another 38 Percent?

A question rarely asked regarding the housing market today is whether prices are affordable.  There seems to be this implicit belief that because prices have fallen so drastically that they somehow must reflect a bargain.  This is not necessarily true.  I think in our consumerist society people are conditioned to automatically assume that a lower price somehow means a good deal.  Go to any mall after the Christmas shopping season and you’ll see “amazing” bargains for 50, 60, or even 70 percent off.  But is it really a bargain?  This question is not often asked yet this is the central tenet to the housing bubble that got many Americans into trouble.

In order to understand the housing market, we need to look at the income of the average American.  Yet this is something that is usually removed from the equation when discussing housing policy.  How do Americans pay for their mortgage?  From an ever scarcer W-2 job yet Wall Street and policy makers have somehow consciously avoided focusing on this connection because headline unemployment is at 10 percent.  But let us look at the relation of income to home prices over the decades:

Source:  Visual Economics

Now this is a critically important chart.  At the height of the bubble it took 473 percent of the median household income to purchase a median priced home.  Compare this to 297 percent in 1975.  The current number is 331 percent.  But let us run our own numbers based on Census data.  The median U.S. household income is $52,029 according to the 2008 Census (this number is lower for 2009 but data won’t be released until September of 2010).  The current median home price is $172,600.

Median Household income:       $52,029

Median U.S. home price:             $172,600

But is this affordable?  Not necessarily.  First, let us look at the home ownership rate in the U.S.

67.6 percent of U.S. households own their home.  The housing situation is very much a majority issue for average Americans.  This is where most Americans store their wealth.  51 million households have a mortgage while 23 million live in homes with no mortgage at all (approximately 30 percent).  Let us run the numbers for someone looking to buy a home today with a FHA backed loan since this only requires a 3.5 percent down payment.  Here are the numbers:

We’ll go ahead and use Texas since there is no state income tax there and it will give a better overall net income to the median income household.  After taxes, the family is taking home roughly $3,570 per month.  How much money down is need for a FHA backed loan?  3.5 percent and let us use the $172,600 median home price:

Down payment:                               $6,041

Now if we run the numbers, things look okay here:

$982.60 / $3,570= 27.5% Debt to Income (DTI)

Many bankers will even go with gross income so you will have a better ratio.  However, taxes and insurance are other costs associated with owning a home.  In Texas, these run anywhere from 2.5 to 3 percent.  Let us add that in as well:

PI ($982.6) + TI ($431.5) = $1,414

Now, your housing payment is eating up nearly 40 percent of your income:

$1,414 / $3,570 = 39.6%

What about repairs?  Landscaping?  Garbage pickup?  These are all other items associated with owning a home.  Keep in mind we are using the median priced home in our example and not some extravagant home.  This is what the average American is facing.

Even going back to 1975, prices would still need to fall to meet that price to income percentage:

$50,029 x 2.97 = $148,586

The median home price would need to fall an additional 13.9 percent to go back to 1975 affordability levels.  I’ve seen a few articles mention home prices falling an additional 10 to 15 percent and this seems to fall in line with the above.  Keep in mind this is important because buying a home is now based on income and monthly fixed outlays.  The maximum leverage products like option ARMs are now a thing of the past.  You now have to demonstrate via reportable income that you can afford a home.  With unemployment so high this becomes a challenge.

I always find it fascinating that most charts looking at home prices seem only to go back to the 1970s.  This is when the U.S. Treasury and Federal Reserve disconnected the dollar from any connection to the gold standard.  But let us look at two other periods of relative good economic times, 1950 and 1960:

1950

Median household income:        $3,319

Median home price:                       $7,354

Home price / income = Percent of 221

1960

Median household income:        $5,620

Median home price:                       $11,900

Home price / income = 211 percent

Now this is interesting data.  If we use the 1960 ratio home prices today would need to be:

$50,029 x 2.11 = $105,561

A 38.8 percent drop from current levels.  The above chart from 1975 to the current housing peak in the late 2000s shows housing prices going up for nearly 30 years.  Many average Americans simply assumed this was the normal trajectory of home prices.

But the 1950 to 1960 example shows that after one decade, relative to income, home prices in 1960 were actually cheaper than they were in 1950.  In 1960 the median home price cost about twice the median annual household income.  Some can’t even imagine this number and think this would be ruinous for the economy.  Nonsense from the banking industry.  In fact, the 1950s saw some of the best GDP growth:

Now many would argue that the rise of the two income household has pushed home prices up.  But you can easily argue that it now takes two incomes merely to have what those in the 1950s and 1960s had.  Of course this comes from the insidious ability of the U.S. Treasury and Federal Reserve to siphon off the earning power of average Americans and give massive handouts to the banking industry.  And that is exactly what occurs.  Look back up at the mortgage calculation chart.  Aside from the monthly payment, notice something else?  The “cost” of that cheap 5.85 percent mortgage is going to run you $187,176 after 30 years.  In other words, the interest you pay is more than the actual home price.  Now if banks are borrowing near zero from the Fed why not allow average Americans to borrow directly from the Fed since virtually every mortgage is now guaranteed by the taxpayers?  Because interest and fees, unproductive aspects of our economy are being taken from the banking industry and suffocating the balance sheet of average Americans.

Home prices have gotten more expensive because the crony banking system is hungry for more and more profits.  If banks had to lend their own money, home prices would automatically adjust lower.  Is that necessarily bad?  This would provide more mobility and less of a focus on homes as commodities and more as a place of shelter.  Take for example the current bust.  Say someone in struggling Detroit finds a job in New York but can’t sell his home.  Say that new job utilizes their skills more effectively.  How is their inability to move helping the overall prosperity of our economy?  It isn’t.  Yet this is the position millions now find themselves in.

I would argue that homes are still very expensive yet the propaganda is flying from the banking industry because they want people to buy homes even though they can’t afford them.  Ironically cheaper home prices would help our economy in the long term but this would cut into additional banking profits since they currently hold over priced real estate, both residential and commercial, and want to off load the waste at peak prices to the taxpayer.  The corporatocracy has caused more and more damage to our economy and inflating home prices has been one of the outcomes of giving too much power to the financial sector.

In the 1950s and 1960s when our economy was relatively healthy and booming home prices cost about twice the annual median income.  That number sounds about right even for today.  Yet the propaganda is strong and many simply want to believe that a big drop in prices means homes are now cheap.  Don’t believe it.