For the past three years economists and the media have been proclaiming that homes were simply too expensive, that nobody could afford to buy a home, and that once housing became more affordable and home values declined, more Americans would be able to achieve the dream of homeownership.
Well, that "philosophy" isn't exactly working that well, if you've been watching the events of the past year unfold, there have been some very serious ancillary side effects to this somewhat lethal prescription for housing affordability.
According to the National Association of REALTORS and their housing affordability index, in November of 2008, before rates really plummeted to historic lows in January, the composite (fixed and ARM) housing affordability index was already at 142.4, this is the highest on record since 1973 when the index peaked at 147.9. As a frame of reference, in 2005 when existing home sales hit an all time high with over 7 million units being sold, the affordability index was only 111.8. At the time, that was the lowest affordability index since 1986.
In case you were wondering the housing affordability index measures income, home price, as well as mortgage rates.
Despite housing affordability hovering near historic highs, the housing market is collapsing as it sinks into the worst downturn since the great depression as there is currently an 11.2 month supply of housing, the highest on record, this despite the fact that home values have already plummeted 18% from their high in 2006. Existing home sales are at a 4.5 million annual pace, the lowest since 1997 (source: NAR). New home sales are at an 433,000 annual pace, the lowest since 1982 (source: Department of Commerce).
The point is that allowing home values to continue to erode as a result of the supply and demand imbalance is not going to "cure" the real estate market. It's not about affordability. Unfortunately, continued property value declines are exactly what is going to happen based on current market conditions and the number of foreclosures that will be coming to the market over the next four years. Home values are going to continue to decline precipitously bringing the broader economy down with it, yet housing affordability will shatter historic norms.
What the proponents of "housing affordability" and lower home values have overlooked is that there simply are not enough buyers that have the credit and capital that can enter the market and make a dent in the excess housing inventory which is a result of home value declines and foreclosures. Homeownership rates are still hovering near 68%, well above the historic norm of 64%. In other words, the "cancer" of declining property values which is turning into an epidemic, can't also double as the cure for saving the housing market in the name of "housing affordability". The housing affordability index proves this.
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