Wednesday, May 11, 2011
Despite Housing Market Crash, U.S. Homes Remain Unaffordable
Barry Ritholtz over at the Big Picture has an in-depth rebuttal against a Businessweek article that expresses bafflement at the fact that "Americans Shun Cheapest Homes in 40 Years as Ownership Fades."
Ritholtz's original article is definitely worth reading, but I wanted to highlight a couple of his main points, especially since I would like to buy a house sometime in my life, and given the massive (and ongoing) housing and property bubble in the U.S., I'm seriously doubting whether I'll ever be able to afford to purchase a house.
So, the National Association of Realtors (NAR) is bemoaning the fact that not too many people are buying houses at the moment, even though by their metric, "falling prices have made real estate the best buy in at least four decades." (When reading anything put out by the NAR, one would be wise to remember that the NAR is a group of people who only get paid when houses exchange hands - which is why its chief economist was encouraging people to purchase homes at the peak of the real estate bubble - so one should always take anything NAR says with a huge grain of salt.)
What do the data show? If you look at the ratio of median incomes v. median home prices (and price appreciation v. rent costs) over time, this is what you see:
From 2000-2007, you see a HUGE increase in the cost of houses relative to both income and rent, and the ratio STILL hasn't reverted to the historical average, even after the prolonged crash we've seen. In fact, it looks like the cost of homes is creeping back up again, away from the historical average - meaning that, for the foreseeable future, there's probably no home ownership in my future.
As a contrast, here's NAR's Home Affordability Index, which dips below 100 if homes are considered unaffordable. This only happened for one month, in 2006, during the biggest residential housing bubble in history:
So, I'm sorry to all of you current homeowners, but your houses are probably still overvalued - and I wouldn't consider buying a house from you until prices fall even further.