Lies, Damn Lies and Affordability Indexes

By
Mortgage and Lending with CQ Financial Group

My apologies to Mark Twain.  There has been a lot of comment today about the dreadful numbers that come out with each affordability index report and I would like to take the opportunity to play devil's advocate.  Sometimes, when I look at a new report or statistical anylysis, I run the report's conclusion through my "common sense meter" before I even begin to read the data.  The same way they used to teach us in math class: guestimate the answer so you can readily see if your calculations are severly flawed when you are finished.  In the case of housing affordability here in Southern California, the reality seems to differ from the reports.  We can't build enough homes to satisfy the demand.  The CAR leadership council recently released these projections: by 2008-2010 California is expected to be 15,000,000 homes short of demand!  In an earlier post I reported that The US Census bureau projects massive influxes of people to the sun belt and California will remain the most populous state by a landslide.  It is difficult to see how this continues to happen when only 1% - 24% (depending on the report you read) can afford to live here.

More probable, the reports themselves are flawed.  Most of these studies are done using very outdated lender paradigms (e.g. housing can not exceed 28% of gross income) which will certainly skew the results as well as the free market.  After all, if a buyer is willing to pass up a new car or eating out in order to pay 50% of their gross income to live in San Diego, should we be judging that?  Many people would make sacrifices to live someplace they find especially appealing, whether it be the weather of San Diego or the historic roots of Boston.  How about the amazing arts & culture of New York City?  Many people give up their cars altogether to live in Manhattan - another area with a terrible affordability index.

I am not, by the way, advocating the use of the many exotic loans out there that allow people on wieners and beans income to buy champange and caviar homes.  I have never in over twenty years put a client into a "neg-am" for ethical reasons alone.  And I am not discounting the fact that an affordability gap exists in many major cities as a whole; I am only discounting the severity of the problem.  A fluid and open market place will hurt some of the people some of the time.  But in the end it provides the most good to the most people by virtue of its self-correcting mechanism.  If specific areas were truly unaffordable, people would stop buying homes there and prices would stablize or come down.  On the other hand, if the demand far outstrips the supply... you may incur many problems, but a lack of affordability, by definition, is not one of them.

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Rainmaker
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William J. Archambault, Jr.
The Real Estate Investment Institute - Houston, TX

Sean,

Very well said.

Loans are tools and consumers should be able to use even the most exotic ones. When people exercise their right to choice they must also accept the required responsibility that comes with it.

I couldn't agree with you more about people having a right to set their own priories. I believe most of the problems, actually more complaints than problems, in most cases are because people forgot why they used certain non-conforming loan programs. People forget the benefits they enjoyed when it comes time to pay the piper.

People have to step up and do what's necessary now.

The bigger issue is the very real potential for feel good legislation to punish our industry for the consumers lack of responsibly.

Their has been some real abuse and when it comes to light we need to jump in and help. We also need to educate the general public, for certainly like the YSP debate the uninformed masses will believe the finger pointers no matter how wrong they might be.

Bill

William J Archambault Jr

The Real Estate Investment Institute

http://www.reii.org

Jan 11, 2007 01:40 PM #1
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Renée Burrows
Savvy Home Strategies Realty, LLC-REALTOR®-Estate-Probate - Las Vegas, NV
Las Vegas Real Estate Broker - www.urLVhome.com
Great post!  The so-called "data" the media or "research groups" use is flawed.  There has been a heated discussion on a featured post for the last day or two about this.  Real wages and rent prices ALONE do NOT determine a market's demise or affordability index.  They leave out too many factors:  land scarcity, population growth, job availability, population density and I could go on all day.
Jan 11, 2007 02:54 PM #2
Rainer
10,732
Sean Purcell
CQ Financial Group - La Mesa, CA

Renee, I agree with you on the facts.  You list many of the reasons these studies are flawed and there are, as you said, many more.  The thing is, even if some people have a hard time understanding why studies can be inaccurate, I wish they would look at the world that is happening around them.  People vote with their feet and their pocketbooks.  Everything we need to know about the real estate market is shown to us every day.

Bill, you hit the nail on the head with both "feel good legislation" and the abuse that has happened.  I will write another post on this subject as it near and dear to my heart.  Bottom line, however, is that there is a lot more responsibility on the LO these days and it is not being respected or even acknowledged.  If we don't get a handle on this as a group, the government will step in and do it "to" us.

Jan 11, 2007 04:05 PM #3
Rainer
153,578
Scott Gormley
Oak Valley Mortgage-California Home Loans and Refinancing - Chico, CA

Hey Sean,

I like the post! I think it's time that we battle the mainstream media on the topic! The NAR has spent millions of dollars in a recent campaign to curve the media on "how bad the market it!"

Scott

Jan 18, 2007 02:33 AM #4
Rainer
10,732
Sean Purcell
CQ Financial Group - La Mesa, CA

Scott,

I appreciate your comment and your point.  The media too often puts the worst spin on a story in order to fit their editorial or marketing needs.  In the mean time the market seems to have settled itself and demand is definitely picking up... I am still waiting for the stories discussing this good news.

Sean

Jan 19, 2007 03:53 AM #5
Rainmaker
310,206
Brian Brady
San Diego VA Home Loans/858-777-9751 - San Diego, CA
858-777-9751
Feb 22, 2007 02:51 PM #6
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