During the housing boom, while rising prices were inspiring giddy exuberance among consumers (and their agents), some analysts saw a particularly troubling danger signal: Home values were outstripping income. Eventually, buyers wouldn’t be able to afford those attractive homes anymore, and the bubble would burst.
The mortgage industry responded to the price increases with “creative financing” to keep the pipeline flowing. Thus, the affordability gap was masked for a time by the proliferation of easy loans. But eventually, demand dried up—virtually overnight in some places.
You know the rest. Home prices plunged by about a third nationwide, and foreclosures sprang up like mushrooms after a rain. That affordability trend reversed, and homes are now dramatically undervalued, according to a recent analysis by Capital Economics. As noted by DSNews, the report shows that by the third quarter of 2011, homes were undervalued by 23 percent—the lowest level since 1975.
—Which makes it a great time to buy, of course. So, why aren’t home sales going through the roof? Cash investors have accounted for much of the activity of recent years, but they will eventually run out of funds. Existing homeowners are typically tethered to underwater loans; their only exit is through short sales—or foreclosure.
The key to real recovery is new—read young—buyers. Happily, that first home hasn’t been this accessible for almost a generation. And credit is finally becoming somewhat more available too.
If you’re young and employed—it makes sense to think about buying. And if you’re an agent, it makes sense to find such people.