Housing Needs to Fall 30% From Peak to Maintain Affordability « naked capitalism

Friday, June 27, 2008

Housing Needs to Fall 30% From Peak to Maintain Affordability

Even though the Fed has cut short term rates, those in the real estate business know too well that mortgage rates are rising. What is worse, an article in Bloomberg suggests that despite price declines, housing has become less affordable. In other words, even with the drop in purchase prices, the monthly cost of mortgage payments is higher. That of course means residential real estate had to fall further to come in line with incomes.

Note also that this analysis did not factor in the impact of higher energy costs on home ownership.

From Bloomberg:

Rising mortgage rates are driving up the cost of buying a house even as prices fall, making property more expensive across the U.S., according to a new study by Zillow.com, an online provider of home valuations.

Monthly payments on 30-year fixed mortgages are 6 percent to 10 percent higher in 41 of the top U.S. housing markets than they were two months ago. First-quarter prices have declined from a year earlier in 88 percent of those areas, Zillow said.

“We’re going to need about a 30 percent decline in house prices if you are going to keep payments stable,” said Morris Davis, a former senior economist with the Federal Reserve and now a real estate professor at the University of Wisconsin-Madison’s School of Business….

Rates for 30-year fixed-rate home loans were about 6.3 percent when the Fed first reduced its target federal funds rate nine months ago. They’re now just under 6.45 percent, data from Bankrate.com show.

Zillow based its calculations on almost 25,000 mortgage offers to potential homebuyers with credit ratings of at least 680 out of a possible 850…

The average monthly mortgage payment rose $131, or $1,572 a year, since the beginning of April in the 41 areas surveyed, Zillow said. The figure is controlled for population….

Mortgage payments rose the most in the California metropolitan areas of Ventura and Santa Rosa, gaining 10 percent, according to Zillow. That added $220 a month to loan payments in Ventura and $189 in Santa Rosa. Home prices in those areas fell about 20 percent in the first quarter from a year earlier, the company said…

In New York, New Jersey, Long Island and parts of Pennsylvania, where the median estimated home value is $418,500 and APRs have risen from 5.9 percent to 6.5 percent, today’s buyers can expect to pay $1,656 more a year while home values for the region have dropped about 1.4 percent….

The cost for 30-year fixed-rate jumbo mortgages has increased more than 2 percentage points since June 2003, according to data from Bankrate.com. Over the past year, the average spread between jumbo and so-called conforming mortgages has been about 93 basis points, or 0.93 percentage point. That gap is now about 111 basis points.

“While it’s a buyers market in terms of home prices, that is definitely being mitigated by the cost of financing,” said Stan Humphries, Zillow’s vice president for data and analytics.

8 Comments:

S says:

June 27, 2008 at 9:01 am

or thehighe rwater and electric and property and sales taxes that local municiaplities will (school too) move on as their situations become dire. Pays to rent.

Anonymous says:

June 27, 2008 at 9:14 am

This article is typical Bloomberg rubbish. Mortgage rates are up 6%-10%. Home prices must decline 30% to keep mortgage payments stable? Doesn’t take a math major to realize that makes no sense. The reporter is using an unrelated quote from some economist and trying to apply it to the recent mortgage rate increases.

If mortgage rates go up 10%, to first order homeprices need to go down about 10% to keep the payment stable.

In the article they cite Zillow saying, mortgage payments are up 10% in SoCal and home prices are down 20%. Clearly they aren’t comparing like numbers. Prices down 20% and rates up 10% will yield a lower mortgage payment.

The real story here is the disappearance of affordability products. Mortgages rates up 10%, disappearing ARMS and Option ARMs, and home prices down 20% could give you a higher average mortgage payment. The reporter is missing the story completly. Effectively mortgages rates are up more than 10%, rates have risen but borrowers have also been forced into fixed rate loans with higher rates than the intro rates on ARMS. If he had done some simple math he would have seen there is something more interesting going on here.

Anonymous says:

June 27, 2008 at 9:29 am

whatis interesting is that everything the fed has totally lost control of the situation. In attempting to manipulate the yield curve to recapitatlize the banks, they are going to increase the magnitude of the losses, and destroy our economy at the same time.

David says:

June 27, 2008 at 10:06 am

I am in total agreement that housing prices are still way too high. A 30 percent decline would be good in the long term interests of America.

But in the short term a lot of misery for speculators who wanted easy money for little effort. Being a builder myself in both remodeling and new construction, I’ve seen all the profits going to banks while little changes on the productive side of the ledger. Lumber, wages, and such are probably going down but those fees and closing costs and interest have been growing for some time. Now the latest creative scheme for the financial sector is to squeeze money out of old people for their houses. The Bubble never stops!

We need to get back to where production, not speculation is the root of wealth in this country.

Anonymous says:

June 27, 2008 at 11:37 am

I am SO SICK of ARMs and Option ARMs being called “affordability products”. HELLO! If you raise the principal, and lower the payment — the loan costs MORE! to the consumer. This is BASIC. It is always cheaper for the consumer to have a 30 year fixed. You don’t buy a house like you might (but shouldn’t) buy a car – focused solely on the monthly payment. At some point the loans have to actually be amortized, and if you can’t afford to pay it off at a rate that actually amortizes the principal, you can’t afford the principal! got it?????? Affordability has everything to do with PRICE and NOT FINANCING! Not only were people paying too much in price, but then they opted for loans that made the price even more affordable. So, both “affordability products” and sky-high prices must evaporate to return to true affordability. Otherwise, we’ll be like Europe and have to inherit a home and structure our economy to support regions because no one can move around. If you like the high housing prices, congrats, you just took a pay off from your and your decendents’ future. Hope you like it.

Anonymous says:

June 27, 2008 at 12:04 pm

I am SO SICK of ARMs and Option ARMs being called “affordability products”. HELLO! If you raise the principal, and lower the payment — the loan costs MORE! to the consumer. This is BASIC. It is always cheaper for the consumer to have a 30 year fixed. You don’t buy a house like you might (but shouldn’t) buy a car – focused solely on the monthly payment. At some point the loans have to actually be amortized, and if you can’t afford to pay it off at a rate that actually amortizes the principal, you can’t afford the principal! got it?????? Affordability has everything to do with PRICE and NOT FINANCING! Not only were people paying too much in price, but then they opted for loans that made the price even LESS affordable. So, both “affordability products” and sky-high prices must evaporate to return to true affordability. Otherwise, we’ll be like Europe and have to inherit a home and structure our economy to support regions because no one can move around. If you like the high housing prices, congrats, you just took a pay off from your and your decendents’ future. Hope you like it.

Anonymous says:

June 27, 2008 at 12:15 pm

“I am SO SICK of ARMs and Option ARMs being called “affordability products”…”

Where did I say that the disappearance of Option Arms was a bad thing? I simply said that their disappearance has effectively lead to a much larger increase in intial mortgage payment than from just the 30yr fixed rate rising.

Like the name or not that’s what the industry calls them. I completely agree with you that for the majority of people they were more “expensive” ie “less affordable” in the long run. Perhaps a new name would better describe them? Optically affordable products?

Anonymous says:

June 27, 2008 at 2:52 pm

Anonymous 10:14 AM,

You sound very much like a typical realtor would talk. Not sure if you are a realtor or not, but you seem to have misread or misunderstood the article. It is not saying that because rates on fixed mortgage hav gone up by %10 THEREFORE house prices have to fall %30. What it is saying that if the expectation of the house price drops was like %20 before the rate increases, now we should expect a deeper cut in the prices on the order of %30 to compensate the rate increases enough so that people can afford a house based on the historical %28-33-of-income rule. This is in fact quite a reasonable statement. The effect of the rate increase is to increase the already expected drop in prices even more.

Also, when Zillow (or anyone) says the prices are down %20 and rates are up %10, your calcualtion obviously is not doing justice, either. The home prices are based on the home sold during a time frame (not all homes that owners are already paying mortgages for), so the sale prices reflect what is actually being transactioned. The monthly payment, on the other hand, is reflecting what people who are paying for their house will experience and covers ARMS and other types as well and so are subject to change. So, thye are not completely correlated things that you are combining by a simple linear equation…

And the “economist” you want to go againt is a former senior economist with the Federal Reserve and now a real estate professor. What are your credentials?

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