Consider the following points when considering whether we are witnessing the next residential real estate bubble:
- The U.S. Census Bureau released median income statistics on September 21, 2009. Do your buyers' have income above or below the Median Income (see, http://www.census.gov/hhes/www/income/statemedfaminc.html)?
- The IRS released updated expense standards effective November 1, 2009. Are your buyers' actual household expenses above the IRS National Standards (see, http://www.irs.gov/businesses/small/article/0,,id=104627,00.html)? Will their actual household and utility expenses exceed the local standard for their state (see, each state's local standard at http://www.irs.gov/businesses/small/article/0,,id=104696,00.html)?
- If their average monthly income (gross income before taxes) is less than the median income in their state, can they afford the home they are trying to buy?
- If their household expenses exceed the IRS standards and their average monthly income is less than the local median income, can they afford that home? Can they still afford that home even if their average monthly income exceeds the median?
- If your buyers did not qualify for the home buyer's credit, would they still be able to purchase that home?
- If that loan they are applying for is not a fully amortized loan, given the above, if it were fully amortized, could they afford the payments?
- If a new home buyer should have 6 months of actual household expenses, including mortgage payments, saved in the event of job loss or other catastrophe (a real possibility today), do your buyers have sufficient reserves?
- If the banks/lenders/servicers in your area were to release their inventories into your marketplace, what would befall the valuations in your marketplace?
- If foreclosures were to return to their natural progression and cycle, rather than being slowed by trial loan modifications and other market manipulations, what would happen to the price of homes being purchased by first time home buyers?
If any of this analysis sounds familiar, it is! From October 2001 through April 2007, home prices accelerated based upon an artificial manipulation of affordability by the credit industry, as supported by willing and uninformed consumers. The above concerns were tossed aside in favor of unreasonable anticipations of ever more home price increases.
Shouldn't today's buyers be asked the hard questions of affordability? In balancing the risk of losing sales against the risk of yet another and even greater catastrophic housing bubble, isn't it the duty of each of us who touch their lives, the buyer's agent, the attorney, the mortgage broker, to ask the hard questions?
In our office, when asked to do so for a potential buyer, we run each client through the Bankruptcy Means Test that challenges the concept of affordability; applying the above government statistics and standards through an accepted formula.
if banks/lenders/servicers were to release housing stock into the market place based upon affordability, rather than accounting manipulations to avoid marking the value of their inventory to market, what would happen to home values?
It will do none of us any good to go through yet another housing bubble. But, that is exactly where we are headed if actual affordability is not brought back to (and kept in) the market.