Could the soft market possibly be due to a decline in housing affordability?  Possibly...  This coming fall will mark the one year anniversary of the housing markets fall from grace.  The more optimistic predictions had this fall as being the beginning of the road to recovery!  I sure hope so.  Most prognosticators, however, are saying that the housing market is not quite finished softening and nearly every week we hear something more about a further downturn, more subprime problems, woe to the real estate world...  The latest puts the bounce-back beginning closer to the end of 2008.

One of the latest sob stories to be added to the mess is that of declining home affordability.  What!? you might ask.  Well, I agree.  This might sound counterintuitive...why am I stating that homes are LESS affordable even though home prices are less inflated?  This is very perplexing when you put today's market into historical prospective.  Yes, the interest rates for 30 year fixed loans were at 6.7%, a point higher in June 2007 than they were two years ago, but they still aren't that bad!

Probably the most telling part of the National Association of Realtors' (NAR) Housing Affordability Index (HAI) still looks...ok.  Overall the HAI has dropped in each of the first six months of 2007.  (The HAI comes with two qualifications, according to Walter Molony of NAR.  It is not seasonally adjusted, and has historically shown seasonal bias.  And...Molony says that due to lending standards being different today than when the index was created in 1981, the HAI is a rather conservative measure of housing affordability.)

We now have to determine the cause if it seems that traditional measures of affordability are still relatively good.  Well...we need to rewind to several years ago when we were in the peak of the real estate boom.  Remember those adjustable rate mortgages (ARMs)?  Ohhh yes.  Those ARMs.  The majority of the people who chose to go with an ARM did so because they couldn't afford the 30 year fixed payment and the initial interest rate was lower allowing them a lower monthly payment.  This allowed people who wouldn't otherwise be able to afford a mortgage the opportunity to own a home.  There was some risk involved...and homeowners entered into the ARM because it was the only way they could afford a home! 

Homeowners were either banking on being able to make the higher payment once the ARMs started adjusting...OR...they were going to refinance into a fixed rate as their credit improved, income improved etc.  It seemed like a fairly safe gamble for some, but was it?

At the time, house values were escalating and if it came down to it, the homeowner could borrow against the equity in their property to help make up the difference when the ARM started adjusting...right?  WRONG!  The housing market started softening.  The subprime lending market plummeted...oh no!

Here we are.  September 2007.  Houses are cheaper, but are the affordable?  Apparently not, because if they were affordable, people would still be buying homes as rates are still low and falling, just like home prices.  I have a feeling that once everything levels out, houses will once more be affordable and we will see the market pick back up.