Affordability of Housing

by Don Boudreaux on December 29, 2005

in Standard of Living

On the front page of today’s New York Times is a report that I hope against hope that Paul Krugman reads the next time he’s tempted to write that ordinary Americans are no better off economically than we were a generation or so ago.

Here are the opening paragraphs of the NYT report:

Despite a widespread sense that real estate has never been more
expensive, families in the vast majority of the country can still buy a
house for a smaller share of their income than they could have a
generation ago.

A sharp fall in mortgage rates since the early 1980′s, a decline in
mortgage fees and a rise in incomes have more than made up for rising
house prices in almost every place outside of New York, Washington,
Miami and along the coast in California. These often-overlooked changes
are a major reason that most economists do not expect a broad drop in
prices in 2006, even though many once-booming markets on the coasts
have started weakening.

The long-term decline in housing costs also helps explain why the
homeownership rate remains near a record of almost 69 percent, up from
65 percent a decade ago.

(Hat tip to Karol.)

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Bob White December 29, 2005 at 9:42 am

Who benefits the most from the housing boom? Governments funded by property taxes, that's who. Local gov'ts will continue to rake in the dough in perpetuity. If I moved to a new bigger house today, I might be able to afford the larger mortgage, even with slightly higher rates. But I would never be able to afford a doubling of my monthly escrow payments.

It's funny how quickly politicians are to scream about windfall profits after momentary upticks in oil company earnings. Where's the ruckus about local government's windfall "profit"?

Siggyboss December 29, 2005 at 11:29 am

"It's funny how quickly politicians are to scream about windfall profits after momentary upticks in oil company earnings. Where's the ruckus about local government's windfall "profit"?"

How else can these demagogues, err politicians, get votes? Nor will they return the bribes, err campaign contributions, from the evil oil companies selling us what we want.

Aaron Krowne December 29, 2005 at 11:47 am

Things are certainly better. But I am unconvinced that there will be absolutely no widespread pain in a housing market pullback in the next few years.

I myself tried to buy last year, and just a condo at that, but did not do it because I was unable to improve my financial position doing it.

As Greenspan has commented, there are a lot of suspicious, "creative mortgage tools" being widely used for the first time in this housing market. No one knows what will happen to them and the people that hold them in the near future; in a climate of rising interest rates, declining valuations, and possibly recession.

This is a new situation in a few ways that do not portend smooth sailing. For one, while home ownership is higher as a percentage of earnings, this also means home owners are more leveraged, which exposes them to a greater extent.

Another interesting factor is that foreign players are such a major debtor to us, including the debt backing real estate assets. The proof of the hazard? When China allowed its currency to rescale by 2%, mortgages immediately inched up by about 6% (not absolute, but relative, of course).


Stefan Karlsson December 29, 2005 at 1:08 pm

The fact that people keep buying houses does not mean that they are affordable to them.

For some members of minority groups, subsidies from the Bush administration have enabled them to buy houses they couldn't afford with their own money. But more generally, people "afford" their homes simply by borrowing. That is why the savings rate is negative.

K December 29, 2005 at 4:15 pm

Housing is not generally over-priced. But expectations have changed. Post WW2 the average new house was about 1100 ft2, one bath, no central heat, no air conditioning, no attached garage, no tile floors, no paved drive.

In other words it was about as desirable as moderate mobile home parks are now.

Even by 1970 new homes were usually under 2000 ft2 and much inferior to current standards.

I hope young people get the house they want, I did after some decades. But almost no one living in fine homes actually begins with one.

RP December 30, 2005 at 1:11 am

Are you saying the home price to income ratio has improved (ignoring that health care cannot be used as a mortgage payment), or are you saying the monthly (IO, ARM, flexible payment) payment has improved?

I would submit that home "occupancy" is reasonably affordable now, but home purchasing
(i.e. eventually paying the full price) is not, by a long shot.

MjrMjr December 30, 2005 at 1:55 pm

The article cites NY, California, Washington, and Miami. Does that mean that housing is affordable in Vegas, Arizona, Boston, and Chicago? I tend not to think so.

I think the rise in homeownership can be attributed more to risky financing tools(interest only, adjustable rate, negative amortization, etc)and the psychological feeling of "I have to buy now before I'm priced out of the market" than anything else. Look at stats in the last year or two in some of the hot housing markets on what % of houses are bought via interest only or negative amortization loans. It's pretty staggering.

Will there be a broad drop in prices nationwide in 2006? That's hard to say. I think it's fairly safe to predict, however, that some of the more overpriced housing markets will see year on year depreciation for several years in a row and that in real dollars prices could fall by at least a third. I can't say what this will do to the numbers for the nation as a whole but given the amount of money in these bubble markets and the % of new jobs that were driven by housing(construction, finance, home improvement) I have no doubt that the economic fallout *will* be felt nationwide. Looking at where I live I think that the DC housing market is poised to take a big tumble.

Here are two of my favorite blogs that comment on the housing bubble.

franck December 31, 2005 at 6:54 am

Compare that to what happens in France. There the overall home ownership rate has stagnated since 1982 to roughly 55%. But the worse part is that ownership amongst young people has completely stalled. And while in 1982 16% of households headed by those under the age of 30 owned their residence, that figure had dropped to below 10% in 2003, less than one-half the rate in North America. The fact is that without family help most French people will never be able to own their homes.

That explains a lot…

K December 31, 2005 at 4:55 pm

Life expectancy is a big factor in home ownership. Today it is not uncommon for four adult generations of a family to be alive. In 1900 three would have been unusual.

Presumably this delays inheritance. And implies also that more households (not necessarily more children) would exist.

Therefore more residences are needed and a big source of funding, inheritance, is less available.

Provided the rise in life expectancy tapers off the effect will stabilize.

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