Something has been puzzling me about the South Florida Market stats in the last few months. There is a lot of noise around town about affordable housing and yet the properties under $250,000 are still on a free fall in the wrong direction.

So after some considerable thought, here is some things to consider...

Assumption 1 - Although we are fortunate in South Florida to have a national and international second home market, there is still a good percentage of local buyers who move around and buy up or buy down within the same general area.

Assumption 2 - Incomes have not risen at the same rate as real estate prices, tax increases and property insurance costs. 

Assumption 3 - If the entry level market doesn't churn - the middle market stagnates.  In other words, if entry level buyers can't sell the place where they are now they can't move up in the local market, thereby causing the middle priced houses to sit as well.

With those assumptions in mind, let's go to what I call the Affordability Equation.  You mortgage brokers out there will be familiar with the rationale, but the basic idea is that people can only buy what the bank will lend them based on the ratio of housing costs to income...or 

                                    mortgage payment + insurance + taxes + maintenance fees (condo only) = Affordability Equation

Ok, math lesson over, let's put some real life numbers to it...to make it simple, I am going to use an interest only loan

2 years ago... here was a typical entry level sale

Sales Price $150,000 100% financing Int Rate - 6%  Tax Rate 1.5% Insurance $1 per year per thousand... so

                             750 + 187.50 + 125 = $1062.50

Simple qualifying - housing can be 28% of income so a buyer had to make somewhere around $45,000 +/- to qualify.

In the past 2 years prices, taxes and insurance have all gone up... so

Sales Price $175,000, 100% financing, Int Rate 6% Tax Rate 2% Insurance $2 per year per thousand ...so

                          875 + 290 + 290 = $1458 or $62,500 per year to qualify  a whopping $17,500 per year more.

So, smart realtor that you are- you say - take that price down and get that house back to affordable... well - that still leaves the taxes and insurance increases to deal with which still means a buyer still needs to make $8,500 more now than than 2 years ago, which by the way means that income of $45,000 had to get 10% raises in each of those 2 years just to be able to keep up with the increases in taxes and insurance.

Now when you throw in the sub prime lending effect on 100% financing and it makes this picture a bit more dismal.  So what needs to be done to get this market moving?

The legislature has taken a stab at cutting insurance and now taxes with little impact.  So for now it's time to do the  price limbo - how low can you go???  Based on my calculations, that $150,000 price needs to come down to  $130,000 or so.... OR

Consider using  suggesting a 2/1 rate buydown to your seller. This program "buys down" the buyer's interest rate by 2 points in the first year and 1 point in the 2nd year.  The buyer qualifies on the initial lower rate.   For about $4,500 (as opposed to a $20,000 price reduction), buyers making $43,000 can now qualify again.

This is a simplified example and there are many other variables to be considered, but sometimes reducing the price isn't enough to make this affordable market move.  Once you get the entry level market moving, the road to market recovery is well on it's way.

Active rain has tons of great posts about buydowns - study up and talk to your sellers.