Tag Archives: Median household income

JCHS: Housing Recovery Unlikely to Ease Renter Cost Burdens

Housing Recovery Unlikely to Ease Renter Cost Burdens

by Chris Herbert
Research Director

The headlines continue to trumpet good news about the housing market, including falling vacancy rates and increased construction in rental housing markets across the country. But the flip side of this good news for the rental market is that the share of renters who face severe cost burdens, paying more than half their income for housing, has surged in recent years. As documented in our most recent State of the Nation’s Housing report, the number of renter households facing severe cost burdens reached a new record of 11.2 million in 2011, an increase of 2.5 million households since just before the recession in 2007 (see Figure 1). To make matters worse, this rise comes on the heels of what had already been a decade of worsening rental affordability; the number of renters facing severe housing cost burdens increased by 1.4 million between 2001 and 2007.  In all, the decade from 2001 to 2011 saw an increase of more than 50 percent in the incidence of severe rental cost burdens.

Notes: Severely cost-burdened households spend more than 50 percent of pre-tax income on housing costs. Source: JCHS tabulations of US Census Bureau, American Community Surveys.
To a substantial degree, the sharp rise in renter cost burdens reflects the significant growth in the number of low-income renters who are most likely to struggle to afford housing.  Between 2007 and 2011 the Great Recession pushed the number of renters earning less than $15,000 up by 1.8 million, while those earning between $15,000 and $30,000 rose by 1.1 million. ($15,000 roughly corresponds to what is earned by those working year round at the federal minimum wage.) But over the same time frame, rising rents made it even more likely that households within these income bands would face severe burdens.  Over this four year period, the share severely burdened households among those earning less than $15,000 rose from 67 to 71 percent, while among those earning between $15,000 and $30,000 the share rose from 29 to 33 percent.
But while the number of low-income renters has risen sharply, the supply of housing they can afford has at best remained stagnant (see Figure 2).  In 2011 there were 12.1 million extremely low-income renters who earned 30 percent or less of median incomes in the areas where they lived.  (This is a common income cutoff for eligibility for housing vouchers and is roughly equivalent to our $15,000 threshold but is adjusted for differences in area incomes and family size.)  Meanwhile, there were only 6.8 million rental units affordable at this income cutoff, representing a gap of 5.3 million housing units.  The shortage of affordable housing is made worse by the fact that many of these affordable units are occupied by higher income households. When the number of units affordable for extremely low-income households and available to them is considered, the supply gap in 2011 was even larger – 7.9 million units.  The magnitude of this supply gap testifies to the fact that it is nearly impossible to produce new housing at such low rents, and almost as difficult to maintain existing housing. In fact, 650,000 housing units renting for less than $400 a month in 2001 were permanently lost from the housing stock by 2011.
Note: Extremely low-income households earn less than 30% of area median income.
Source: JCHS tabulations of US Census Bureau, American Housing Surveys.
With the market unable to supply housing affordable for the nation’s lowest-income households, addressing the problem of rising rent burdens may largely come down to efforts to increase household incomes. But there will always be some households facing temporary financial struggles and others facing long-term challenges who will need more assistance to afford decent housing. Currently, only one in four of those eligible for federal assistance are able to obtain subsidized housing. Those who do are among the nation’s most vulnerable families and individuals – 35 percent are disabled, 31 percent are age 62 or older, and 38 percent are single parents with children. With the population of households struggling to afford housing at record levels and continuing to expand, there is a compelling need to assess whether existing resources for assisted housing are both sufficient to meet the need and being used effectively through current programs.
But while options for reforming the housing finance system have been subject to a vigorous debate, to date the issue of how to address the significant problem of rental housing affordability has received relatively little attention.  The Bipartisan Policy Center’s (BPC) Housing Commission report this past year was a notable exception as it both framed the importance of this issue and advanced specific policy options that should be considered.
The next snapshot of renter cost burdens will come this fall when the 2012 American Community Survey is released.  But as we showed in this year’s State of the Nation’s Housing report, rents are continuing to increase in markets across the country, against a backdrop of continued stagnation in household incomes. As a result, it is likely that this more up-to-date data will once again find that rental housing affordability has only gotten worse. Hopefully, the BPC report will start a dialogue on what should be done to address this urgent problem.

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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.

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DeptofNumbers: Growth in Mortgage Purchasing Power

Growth in Mortgage Purchasing Power


Above is a chart of real median household income and the real purchasing power of the same median household income when utilizing a 30-year mortgage. Said another way, if you kept the fraction of real median household income going towards a mortgage payment the same (say 30%), the red line shows the growth in what you could buy with your payment.

The chart highlights the dramatic rise in purchasing power of the median income household despitethe lack of growth of the median household’s real income. Growth in the capacity to borrow has replaced income growth over the last 30 years. Of course this is possible because interest rates have been falling continuously since the early 1980s making it feasible to borrow more and more with less income.

If we wanted to increase purchasing power in an environment where interest rates were not in decline, we’d need to see a substantial increase in real median income. For instance, say 30-year mortgage rates were at 6.5% instead of their recent level of roughly 3.5%. All else being equal, to get the same purchasing power as a 3.5% mortgage rate with a mortgage rate of 6.5% would require a 41% increase in real income! 1 Clearly (and by design in recent years), record low mortgage rates are a huge stimulus for home prices.

What happens when the 30+ year secular decline in interest rates ends? Even if rates stay low, the stimulus of declining rates on asset prices (homes in particular) will disappear. While incomes will likely increase over the next few years, we’ve already seen how much they would need to increase to match the purchasing power effects of falling interest rates. And if interest rates rise even modestly, purchasing power will be significantly curtailed. How home prices, under the additional influences of inertia and psychology, actually respond is another matter.

1. Assuming again that a borrower would want to spend the same fraction of their income on a mortgage payment regardless of the interest rate environment. 

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Rising Home Prices Push Affordability Slightly Lower In Second Quarter

Rising Home Prices Push Affordability Slightly Lower In Second Quarter

by Rose Quint — Eye on Housing

The  NAHB/Wells Fargo Housing Opportunity Index (HOI) fell slightly in the 2nd quarter of 2012, down to 73.8, from the all-time record high of 77.5 recorded in the first quarter of the year.  Firming home prices in most metro areas contributed to the small decline in affordability.

The HOI is the share of new and existing homes sold in a quarter affordable to a family earning the median income.  An HOI of 73.8 means that 73.8 percent of all homes sold during the second quarter were affordable to families earning the national median income ($65,000).

The most affordable major housing market (population > 500,000) in this year’s second quarter was Youngstown-Warren-Boardman, Ohio-Pa., where 93.4 percent of homes sold during the period were affordable to households earning the area’s median family income of $55,700.

Among smaller housing markets, Fairbanks, Alaska topped the affordability chart with 98.7 percent of homes sold during the second quarter being affordable to families earning the area’s median income of $92,900.

Meanwhile, New York- White Plains-Wayne, N.Y.-N.J. retained the title of the least affordable major housing market in the country for a 17th consecutive quarter, with just 29.4 percent of homes sold there being affordable to families earning the area’s median income of $68,300 as of the second quarter.

Ocean City, N.J., remained the least affordable smaller housing market in the second quarter, with just 43.8 percent of homes sold in the second quarter affordable to families earning the median income of $71,100.

For more information on the HOI, including history and details for every metro area covered, please see www.nahb.org/hoi.

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Lawler: Early Read on Existing Home Sales: Given the Benchmark Revision, a “Challenge”

Lawler: Early Read on Existing Home Sales: Given the Benchmark Revision, a “Challenge”

by CalculatedRisk on 12/16/2011 

CR Note: The NAR is scheduled to release November existing home sales on Wednesday, December21st at 10:00 AM ET. The NAR will also release the benchmark downward revisions for 2007 through 2011 next Wednesday.

From economist Tom Lawler:

Based on my tracking of regional realtor/MLS reports, I estimate that existing home sales in November as measured by the National Association of Realtors ran at a seasonally adjusted annual rate that was about 1.8% higher than October’s pace, and about 9% higher than last November’s pace.

What that will mean for the NAR’s estimated sales number, however, is not clear, as the NAR announced that it is releasing updated (and lower) existing home sales estimates from 2007 to 2011. While I do NOT know what the revised sales estimates will be, based on various data sources I estimate that the NAR’s estimate of existing home sales for 2010 will be revised down by about 13% or so. As best as I can tell, 2011 sales data will be revised down by about the same amount as 2010 sales data.

As a result, I estimate that the NAR’s estimate for existing home sales for November will be a seasonally adjusted annual rate of around 4.40 million. If no benchmarking were done, I estimate the NAR’s existing home sales estimate would be a SAAR of around 5.06 million for November.

On the inventory side, the NAR said that its “months’ supply” measure will not be revised, implying that inventories will be revised down by the same percentage as sales. Various sources indicate that aggregate active listings fell considerably from October to November, with my tracking suggesting a monthly drop of about 5% — though NAR inventory numbers don’t always “track” listings data. But if that drop were to happen, I’d estimate that the NAR will report an existing home inventory of about 2.753 million, down about 14.9% from last November.

The NAR has also said that it would not revise its median sales price data. Based on my tracking – which has an at best “so-so” track record in predicting the NAR number – I estimate that the median existing home sales price for November will be down about 4.2% from last November.

CR Note: Tom’s estimate for inventory includes adjusting for the benchmark downward revision. This would put months-of-supply at around 7.5 months, and would put listed inventory at the lowest level since mid-2005.

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The housing confidence game

The housing confidence game – West takes major hit in housing prices in the last 12 month period. More aggressive pricing of distressed inventory through REOs and short sales..

It might be hard to believe that home prices have been falling for half a decade now.  What some have a harder time grasping is the idea of lower home prices in the defiant face of a Federal Reserve pushing interest rates into artificially low levels.  The truth of the matter is many regions especially in California remain in bubbles and these areas are entering a second round correction as more distressed propertiesare brought to market.  We have some troubling data coming out showing a reversing trend nationwide for home prices but also a more significant correction in bubble states.  Wishful thinking would like to believe that home prices will simply move up because that is how things were done for decades and some wish to relive the days of Leave it to Beaver.  Yet we are truly in a new paradigm and household income in the United States has actually fallen for more than a decade and with interest rates at record lows, the only thing that can give is the price of a home.  Let us examine some of the trends currently hitting the market.

Bubble states entering a strong correction

One of the recent changes I have noticed in California has been the aggressive pricing of short sales.  This was not the case even one year ago.  Even in the summer of 2010 when tax credits and other gimmicks were used, many of those on the fence decide to take the plunge based on short-term artificial dynamics.  That short boost has now completely evaporated:

home prices us map

Source:  CoreLogic

The above chart was released this week and shows home price declines over the last year.  The west is not exactly doing well.  This loss is compounded with the first round that hit after 2007.  I would argue that home prices are still inflated in many California cities and we are starting to see more aggressive pricing coming from banks moving short sales and REOs.  If high prices were the name of the game banks would not need to work with distressed inventory since sellers would simply be able to offload properties at a higher price.  Of course the non-distressed inventory is plastered with inflated home prices and many markets in California are simply adjusting to more realistic measures and this is why lower priced distressed inventory is largely dominating the market for sales.

A new shift in income and housing economics

It is amazing how some people will argue simply to justify their own high priced home purchase.  Consumer behavior is fascinating and it reminds me of the conversations I had with people back in 2005, 2006, and 2007 who couldn’t stop talking at cocktail parties about the equity they were gaining each month as if they suddenly had the Midas touch for real estate.  Some that bought in the last two years seem to justify their purchase based on low rates and a lack of understanding of housing economics.  Let us look at hard data here:

mortgage rates us home values

I went ahead and annotated the chart above to make it abundantly clear what was occurring.  From 1970 to the early 1980s home prices and the 30 year conventional mortgage rate all went up.  Why?  Inflation was rampant but also household wages were going up.  In the end it was a wash.  Then, in the 1980s through 1990s you see mortgage rates move lower and home prices still move up.  For these 20 years, you had a bigger comfort at taking on more leverage with bigger and bigger mortgages but also, incomes were moving up.  Then, the bubble takes a hold in the late 1990s and wages did this:

real household income

So while interest rates kept going down thanks to the Federal Reserve household incomes contracted strongly all the while home prices kept going up.  For some it didn’t feel like a contraction because they were putting it on the credit card, taking out an auto loan, or flat out tapping into home equity.  In essence it was papered over with debt but you need to pay it back!  Of course this peaked in 2006/2007 depending at what we are looking at and since then home prices have been going down.  Interest rates are at record lows.  The Fed is underpricing risk yet again just like Greenspan did in lowering rates and actually igniting the housing bubble.  Two things can happen here:

-1.  Household wages go up and home prices remain or increase (this would require healthy job growth in good paying jobs and not putting people to work at Wal-Mart and Dollar General).

-2.  Household wages remain stuck or fall and home prices go lower (this is the pattern that has played out over the last 12 months.  The big wildcard is if risk ignites and interest rates shoot upwards and this can push home prices lower much faster).

These are the only two options with rates at historically low levels.  I heard a couple of people argue that higher interest rates will make home prices move even higher!  This is like saying the poorer you get the bigger your paycheck.

Housing has been contracting now since 2006:

case shiller index and hpi

Aside from the little bump in the summer of 2010, home prices have gone negative year-over-year since 2007.  Anything under that red line means lower home prices.  Home prices cannot operate in a closed arena.  That was the mistake of the housing bubble.  Toxic mortgages and blindly following decades of slow but steady rising home prices gave way to an orgiastic rise in home values even while in the background Americans were getting poorer and poorer.  It was all an illusion built on unsupportable debt and that popped.  Europe is dealing with this right now and we will be dealing with it sooner than many think (i.e., remember the debt ceiling circus?).  The only thing that can change this is a growing real economy yet this is not occurring.

Making predictions in the short-term is a losing game unless you have inside connections.  But on a longer scale, we can derive a few things if we know a bit about history.  From here on out, there will be sizeable defaults and attempts to increase inflation to wash away trillions of dollars of debt.  Yet people are waking up and realizing that the game is largely rigged and money is only as valuable as people are willing to believe.  Think of the $300,000 home in Las Vegas now selling for $80,000.  What physically changed in the structure in the last few years that made the home fall so dramatically?  Confidence.  The same psychology is playing out all over the country.  People rarely think twice about diving into debt if they feel an asset will appreciate.  But what if the odds are it will fall?  What if money is harder to come by?  Now you have a tougher investment decision and the charts above reflect this change in perception.

I have yet to see any solid forecast showing why home prices will go up in the years to come.  To be a contrarian just because you read this in a fortune cookie is nonsense.  This is a new paradigm.  Household wages, demographic trends, and unsupportable global debt point to tough economic times in the next few years and the last 12 months only confirm that.  Oh yeah, and what about the 6 million distressed properties that are still floating out in the market?

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Household Balance Sheet Repair Stumbles But Continues On

Household Balance Sheet Repair Stumbles But Continues On


by Robert Dietz

NAHB has been tracking two key economic variables that are critical for a robust and sustainable rebound in housing and the economy as a whole: the ratio of household net worth to disposable income (NW/DPI) and the personal savings rate.

The NW/DPI ratio can be thought of a measure of the health of household balance sheets. It tells us how much wealth households have relative to available income. Over the last 25 years, this measure has averaged about 5.17 (i.e. households, in aggregate, typically possessed in wealth their current disposable income multiplied by 5.17). In late 2006, this ratio peaked at a value of 6.36. It then fell to 4.6 at the beginning of 2009, as housing price declines and stock market declines eroded household wealth.

The personal savings rate tends to be negatively correlated with NW/DPI, rising as household balance sheets deteriorate and falling as they improve. In turn, the personal savings rate has an important effect on macroeconomic growth, with a rising savings rate holding back short-run growth due to declining household consumption.

The graph above plots the current value of NW/DPI (red line) and the 25-year average (1982-2007) (green line). The blue line charts the personal savings rate. Household net worth data are from the Federal Reserve’s Flow of Funds data and the savings rate and disposable income data come from the Bureau of Economic Analysis National Income Product Accounts.

Household balance sheet repair, meaning household deleveraging as families pay down debts and build up savings, continues as seen by the gradual upward trend of the NW/DPI since early 2009. However, there have been ups and downs in this process, which is crucial for successfully emerging out of a balance sheet recession. We are currently experiencing one such down period, given recent stock market declines. As of the end of the second quarter of 2011, NW/DPI currently stands at 5.04 (plotted on the right axis) and the personal savings rate ( left axis) has ticked up to 5.2%.

It might be useful to see where we stand relative to our expectations from just a little more than a year ago. At that time, my estimate for the current value of NW/DPI was 5.11, somewhat higher than it is today. The estimate for the savings rate was 4.75%, 45 basis points lower than it is today. So while household balance sheets continue to heal from the damage caused during the Great Recession, they are doing so more slowly than expected a year ago.

At the current post-2009 pace of NW/DPI growth, household balance sheets should return to their historical average by the end of the first quarter of 2012. It is not unreasonable to expect NW/DPI to continue to grow higher than this average given more pronounced aversion to financial risk that exists today. But as the ratio rises, the personal savings rate should continue its downward trend, perhaps to 4%. This will increase consumption growth and allow for more job creation and economic growth.

Finally, to give a sense of what has changed in terms of household net worth and balance sheets, data from the Flow of Funds indicates that since 2007:

– Outstanding total mortgage debt is down 5.76%

– Outstanding consumer credit is down 5.16%

– Household net worth is down 9.03%

– Homeowner equity is down 39.62%

– The share of equity relative to the value of owner-occupied housing has fallen from 49.5% in 2007 to 38.6% for the second quarter of 2011

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