Housing Affordability, Mortgage Rates, And Home Sales

Real Estate Broker/Owner

The NAR recently published their May Housing Affordability Index which showed that while affordability did drop from a record high 178.8 in April to 171.6 in May, it remains well above historic norms.

Prior to this year, the highest housing affordability index reading was 147.9 in 1973.  The first five months of 2009 the index has averaged 174.72.

To get some perspective on the current index for 2009 and the relationship to existing home sales, here is what the housing affordability index has looked like over the past couple of years according to the NAR:

Affordability Index / Mortgage Rates / Existing Home Sales

2005:  111.8 / 5.91% / 7.076 million existing home sales 

2006:  107.6 / 6.58% / 6.478 million existing home sales 

2007:  115.8 / 6.52% / 5.652 million existing home sales 

2008:  134.9 / 6.15% / 4.913 million existing home sales 

2009:  174.7 / 5.08% /  4.770 million existing home sales (seasonally adjusted rate of sales)

What this trend has shown is that home sales over the past couple of years have been driven by the access to credit, not necessarily housing affordability or mortgage rates.  In 2005, 2006, and 2007, credit was in abundance and even though housing affordability was low and mortgage rates were higher than we see today, we saw record home sales.

In 2008 and so far in 2009, housing affordability has increased significantly from the prior years, mortgage rates have plunged, and yet home sales are well off of their highs.  The is because the access to easy mortgage credit has dried up, which is not a bad thing, easy money is how we got into this problem in the first place.

The problem is that most economists and those in Washington, including Ben Bernanke and his $1.25 trillion plan to plunge rates, have not recognized that a housing recovery can not be driven solely by lower mortgage rates (or even a first time home buyer tax credit for that matter).  The common denominator is the issue of the access to credit, not the cost of credit.

And while we can't force banks to make bad or risky loans as Washington is trying to manipulate, what we can do is incentiveize those that have the capital and the credit worthiness to go to the banks and obtain mortgage credit, specifically loans to invest in real estate.  As recently as March of this year, Fannie Mae was authorized by the government to allow up to ten financed properties for individual borrowers, yet despite this, the current administration continues to favor ideology over effectiveness. 




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