The Mortgage Corner

A very pessimistic Harvard University Joint Center for Housing Studies’ 2010 annual report says with the job market in dire straits, household incomes declining and foreclosures dragging down home values, the housing market may take years to recover. But the Harvard study is already outdated. Affordability is much better in 2010, and jobs and incomes have improved substantially.

The Harvard study says affordability is still a problem because household incomes have been falling; though not as much as housing prices. Calculate in record low interest rates that are forecasted to last at least through 2011, and we see that affordability is in fact very high. The good news is that prices have fallen up to 50 percent in some regions since 2008, while household median income has fallen about 6 percent.

“Very low mortgage interest rates and recovering labor markets, however, should be enough to shore up sales and housing starts once an expected dip due to the expiration of the federal homebuyer tax credit passes. “If history is a guide, what happens with jobs will matter the most to the strength of the housing rebound,” says Eric S. Belsky, Executive Director of the Joint Center for Housing Studies. “Right now, economists expect the unemployment rate to stay high, but if employment growth surprises on the upside or downside, housing numbers could too.”

In fact, the National Association of Realtors (NAR) reports that the median existing-home price has actually risen 6 percent in 2010, while the median household income is hovering around $60,500. This has kept the NAR’s affordability index at 167 percent—a family with a median income can afford 167 percent of a median priced home. Whereas, it was as low as 115 percent in 2005 when housing prices were in bubble territory (and interest rates were 1.5 percent higher).

Consumers are paying down their debts, in part because of high mortgage debt levels. The year-over-year debt to household income measure that includes mortgage debt has fallen from 23.5 to 21.5 percent, while total outstanding credit is still contracting at slightly less then 4 percent per year, as we said last week.

Consumer credit rose $1.0 billion in April in a gain far offset by a $7.4 billion downward revision to March which now shows a $5.4 billion contraction. Non-revolving credit, reflecting strong car sales, jumped $9.4 billion in April but was offset by a nearly as large of a fall in revolving credit. The drop in revolving credit reflects consumers’ reluctance to buy non-essential items.

clip_image002

What were consumers buying in May? Gasoline led the way because of higher gas prices, but the trend in overall sales is upward and healthy—in spite of the May decline.  Overall retail sales on a year-ago basis in May came in at 6.9 percent compared to 9.0 percent the month before.  Excluding motor vehicles, the year-on-year rate slipped to 6.1 percent from 7.8 percent in April. 

clip_image004

The other pleasant surprise was the continued rise in pending home sales. Already, February and March had spiked with help from last minute buyers wanting to ensure time to close before May 1. But apparently, many buyers decided to push their luck and buy during April in hopes of expedited paperwork by mortgage lenders. Pending home sales extended their surge through April, jumping 6.0 percent, following a 7.1 percent spike in March.  Year-on-year, pending home sales are up 22.4 percent.

clip_image006

The Harvard study seemed to concentrate on the bad news—an estimated one in seven homeowners has a home worth less than they owe on their mortgage, and 5 million need their home price to rebound by 25 percent before they are again above water. But there are more than 45 million outstanding home loans, and the inventory excess is in fact making home ownership more affordable—for those who can afford to buy.

Harlan Green © 2010