A recent study by a leading economist at the Dallas Fed Department, and my grad school econ professor - Dr. Keith Phillips revealed that over the past 20 years housing payments as a percentage of median income have traditionally been in a range, but some areas of the country are alarming.
Through out the 1980's the 55% of the Texans, based on the median household income could afford the average priced home (based on a debt to income ratio of 45%). In the 1990's that percentage ticked down to 48%, and most recently posted a low of 42%. This meant that less than half the state of Texas could afford the average priced home and was seen as an alarming trend and cause for concern. However, a stable housing market in Texas allowed for modest appreciation and did not push most buyers out of the market.
California, however, showed an alarming trend. While the state kept pace with Texas for the 1980's, the percentage fell to 35% in the 1990's and recently posted a staggering 2% rate of affordability in 2007. That meant that 98% of the Californians could not technically afford the average priced home. Obviously, the data was meant to show how the guidelines for affordability did not translate into actuality - as California still reported housing growth for the year.
So, to jump-start the housing market we need a better balance of buyers and sellers. One thing that will be key to a lasting return to the housing market, however, will be more success in pairing buyers to their appropriate spending level. Now that the mortgage industry has undergone a sub prime face lift, I would expect these numbers to come back in line.
Food for thought!
Scott Cummins
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