Tag Archives: Interest rate

JCHS: Despite Rising Home Prices, Homeownership More Affordable than Ever

Despite Rising Home Prices, Homeownership More Affordable than Ever

 by Rocio Sanchez-Moyano
Research Assistant
For those able to obtain loans in today’s constrained credit environment, the monthly cost of homeownership is at historic lows, thanks to low interest rates.  Though the National Association of Realtors’ median single family home price increased by 6 percent in 2012, falling interest rates have made mortgage payments cheaper: assuming a 20 percent down payment and 30-year fixed-rate mortgage, monthly payments on a median priced home in 2012 were $644. Compared to median incomes, payments are lower than they have been in more than two decades.

Sources: JCHS tabulations of Freddie Mac, Primary Mortgage Market Survey; National Association of Realtors;  US Census Bureau, Moody’s Analytics Estimates.

The record low interest rates available in 2012 helped reduce monthly mortgage payments in 82.9 percent of metros from 2011 to 2012; payments also declined in 80.3 percent of metros that experienced price gains.  Even in metros with substantial price appreciation, such as Phoenix (24.6 percent) and San Francisco (11.9 percent), growth in mortgage payments was muted, rising 13.3 and 1.7 percent, respectively.  In fact, interest rate declines over the last year were enough to offset price increases of up to 10 percent price appreciation.

The current interest rate environment would keep payment-to-income ratios affordable for median buyers in a majority of cities even under much larger price increases.  Following the methodology used by the National Association of Realtors (NAR) in calculating their housing affordability index, a mortgage payment is considered affordable if it represents no more than 25 percent of monthly income.  Using this as a threshold, mortgage payments on a median priced home were affordable in more than 95 percent of metros in 2012.  Even if house prices were to rise by 20 percent, without a change in interest rates, 91.5 percent of metros would remain affordable to the median buyer.  In fact, the cost of a nationally median-priced home would have to increase by more than 56.7 percent to become unaffordable at the median household income.  Interest rates are so far below their historical average that few metros would become unaffordable to the median buyer even with moderate changes in interest rate.  For example, if interest rates increased to 5 percent, comparable to rates in 2009, only 2 percent more metros would become unaffordable to the median buyer.

Though mortgage payments are at historic lows, purchasing a home is still unaffordable for many prospective buyers.  In some traditionally expensive markets, such as the large California metros and Honolulu, monthly mortgage payments were already too costly for the median homebuyer in 2012.  For first time homebuyers, whose payments are approximated using a 10 percent down payment on a home priced at 85 percent of the median, and incomes of 65 percent of the median, 17.1 percent of metros were unaffordable.  The effect is more pronounced in the largest 20 metros, as 35 percent of them are unaffordable to first time buyers. (Click table to enlarge.)

Notes:  Payments and payment-to-income ratios for the median homebuyer assume a 30-year fixed-rate mortgage with 20 percent down payment on a median priced home and median income for the metro; for a first time homebuyer, payments and payment-to-income ratios assume a 30-year fixed-rate mortgage with a 10 percent down payment on a home priced at 85 percent of the median and an income of 65 percent of the median, as per the NAR first time homebuyer affordabilityindex. Sources: JCHS tabulations of Freddie Mac, Primary Mortgage Market Survey; National Association of Realtors; US Census Bureau, Moody’s Analytics Estimates.

While it is likely that homeownership will remain affordable in the short term, these historic levels of affordability may not last.  Prices increased in 86.6 percent of metros from 2011-12 and interest rates were slightly higher in the first months of 2012 than at the end of 2012, according to thePrimary Mortgage Market Survey issued by Freddie Mac.  Buyers who were waiting for the best deal as prices and interest rates continued to drop before entering the market may be spurred by current trends to think that this may be the ideal time to buy.

Leave a comment

Filed under JCHS

US versus Japan housing values

A mirror in the real estate sun – Japan posts record trade deficit while real estate values go deep into the 1980s. US has decade long collapse in real estate values in spite of record low mortgage rates. The path of two lost decades in US real estate values is looking very similar to Japan.

The case of having a Japan like correction in our real estate market grows stronger as each year goes by.  The entire notion of zombie banks derives from the crisis in Japan.  Shadow inventory and the suspension of mark-to-market accounting are part of the life support that is keeping many US banks operating.  Two decades later, with low interest rates and no signs of real estate values going up, the Japanese housing market is virtually stuck in a holding pattern.  One thing is now different however as Japan is now starting to run trade deficits.  Japan recently posted a record trade deficit because of a strong yen and rising imports on fuel.  Yet the real estate market has yet to recover and is back to 1980s values.  Can you imagine housing values in the US going lower or sideways well into the 2020s?  Hard to believe but let us examine a few areas where the pattern is playing out on a similar note with new data.

US versus Japan housing values

If we examine the US housing bubble and Japan housing bubble we see a similar bubble bursting format:

Japanese-US-Housing-Bubbles_2011

Source:  Seattle Bubble       

Since the chart was produced US home values have moved even lower.  Japanese real estate values are going back to levels last seen in 1985.  Two lost decades are baked in the cake.  The US has already reached one lost decade.  When you examine items like the above you have to ask what will be the impetus for increasing US home values.  Are we seeing household wages go up?  If you listen to talks of the great car recovery story, part of it had to with rising car sales but a large part of it had to do with slashing wages.  How is that good for increasing home values?

Low interest rates a panacea for home buying?

Some seem to think that low interest rates are a cure all for everything ailing the real estate market.  Certainly the Federal Reserve believes this.  Japan has mastered the low interest rate world:

Japan-interest-and-mortgage-rate-graph-1

Source:  Global Property Guide 

The Bank of Japan has kept interest rates below 2 percent for nearly 20 years.  In fact, the Bank of Japan has had a zero percent target interest rate policy in place since 1999.  As you can see this has keptmortgage rates at incredibly low levels.  Surely with such low rates home building has taken off?

Japan-housing-starts-graph-1

Source:  Global Property Guide 

Okay, well maybe home values have increased:
Japan-residential-urban-land-price-index-graph-1

Home prices have retraced two full decades even in the face of decade long zero interest rate policies by a central bank.  For those that think Japan’s housing market is tiny think again:

global real estate values

Source:  Ministry of Land, Infrastructure and Transport   

Japan has one of the most valuable real estate markets in the world even after their housing bubble completely collapsed.  Over the long-term housing values are driven by local demand.  Bubbles of hot money can emerge like what is being experienced in Canada at the moment.  But these are unsustainable and by definition will burst at some point.

The case for rising rents

The next argument we hear is that somehow low interest rates and zombie like banks will somehow push rental rates higher.  Rents are mainly driven by what people can afford with their paychecks.  And so far, there is no indication rents are soaring in Japan:

Japan-residential-price-against-rent-graph-1

I find this argument fascinating in the US as well.  Of course, once the bubble burst a premium was placed on renting as credit markets seized up and people switched to renting and were unable to obtain a mortgage.  Yet once that short-term premium is exhausted rental values begin to find a natural equilibrium.  Take a look at the Las Vegas market and you can see a tipping point in rents emerge.

When we hear about the issue with youth employment in the US we need only look at issues being faced in Japan as well:

“(CBC) It’s hard to fault Ueda for his lack of enthusiasm. This was supposed to be the year he followed Japan’s decades-long, springtime tradition that sees hundreds of thousands of students bloom into full-time workers.

“I couldn’t find a job, so I’m staying on in school for another year,” he admits with a shrug.

That makes him one of the more than 100,000 new university graduates — 20 per cent of the total — who hadn’t secured full-time employment as of May 1, according to a survey by the Japanese Education Ministry. Their ranks have been growing each year.”

Even with real estate values back to 1980s levels in Japan it is hard to purchase a home with no secure employment.  People always point to the low unemployment rate in Japan but this is somewhat misleading.  Japan has a giant part-time work force, nearly one third of their entire labor force.  These workers operate largely like contractors and surely that cannot be a boost of confidence to take on 40 year mortgage.

Our part-time work-force has also increased in the US:

us_employment_part-time

Source:  Calculated Risk

There are many similarities in how the US and Japanese real estate bubbles burst:

-Massive central bank intervention to save too big to fail banks

-Ignoring bad performing loans thus drawing out shadow inventory or zombie banks

-Artificially low interest rates courtesy of quantitative easing by central banks

-Continuing price declines in the face of record low mortgage rates

-A rising part-time labor force

-Those who argued Japan only carried trade surpluses now see a record trade deficit (see rule on Black Swans)

-Decade long depression on housing starts

-Fast decline in home prices after bubble burst followed by slow and continued decline in real estate values

There are obviously many differences as well but the above is what is playing out.  The US has never had a real estate bubble of this magnitude so it is hard to predict how things will play out.  Yet we can analyze the data and hopefully arrive at some macro-economic conclusions.  We can look at similar situations and ask why our pattern is looking very similar to the bust in Japan.

What are other similarities and differences between the two markets?

1 Comment

Filed under Economy