Thursday, December 22, 2005

Hope you already own a home

Housing is becoming tougher for the middle class to come by. The Fed has raised the discount rate for the last thirteen consecutive quarters to 4.25%, its highest point in over five years (the prime rate, the rate at which banks lend money to their credit worthy customers, runs about 3% higher than the discount rate--it currently sits at 7.25%). And real estate prices have exploded in various parts of the country. Thus (subscription required):

Housing affordability in October sank to its lowest levels since 1991, according to the National Association of Realtors' Affordability Index, a widely followed measure of the average household's ability to buy a home at current interest rates. In some areas, including New York City, Los Angeles, San Diego, San Francisco and Miami, housing affordability has dropped to levels not seen since the early to mid-1980s, according to mortgage giant Fannie Mae.
This is wonderful news for the 68.8% of Americans who own homes or have real investment property. But for those prospective househunters, the situation is hardly encouraging:

Affordability has long been a problem for low-income home buyers. But as home prices have marched steadily higher in recent years, many buyers with healthier incomes also are being squeezed. Declining affordability mainly affects whether first-time home buyers will enter the market, but in some markets people who already own a home are finding it tough to trade up.
Want to take a stab at a primary reason for the squeeze? Start with a little basic supply and demand. As the demand for housing increases, the price people are willing to pay for homes goes up. To offset this, more homes can be built, and in places with ample room for expansion that's been happening. But shoving off to find a place more affordable usually means finding a place, cost aside, that is less desirable:
Declining affordability is forcing many home buyers to accept longer commutes,
says Jane Powers, a broker with Ewing & Clark Inc.
In regions with higher population densities where simply throwing up more housing is not feasible, higher prices result. Recalling the cities mentioned earlier, the astute reader realizes that these are cities characterized by an unusually high population of foreign-born immigrants: New York City (36%, seventh highest in the US), Los Angeles (41.3%, third highest), San Diego (27.9%, tenth highest), San Francisco (36.7%, fifth highest) and Miami (60.6%, very highest in the country). In a future post I am going to look at the correlation between percentage of foreign born and housing affordability by state and, if I can find it without having to pay an exoberant amount, by city as well.

California has by far the most foreign-born immigrants in the country, with 26.9% of its population non-native--and the top six least affordable housing markets are all in the Golden State. In many ways our nation's most populous state is a metaphorical tocsin alerting us to what we can look forward to as millions of unskilled and uneducated immigrants, both legal and illegal, continue to pour into the country: A bankrupt state treasury, atrocious NAEP test scores, high crime, enormous wealth disparity, racial tension, high unemployment, sub altern high school graduation rates (p8), ad infititum.

Partially distorting the saliency of increasingly unaffordable housing are nifty borrowing and financing tricks that save buyers a pittance now in exchange for a mountain being owed down the road:
Some factors have helped offset the decline in affordability. Many borrowers have embraced creative mortgage products, such as interest-only loans, mortgages with teaser rates of as low as 1% and "piggyback" loans aimed at buyers who don't have the money for a down payment. In the third quarter, borrowers could boost their purchasing power by 26% by taking out an interest-only mortgage, which allows a home buyer to put off repaying principal for several years, instead of a standard mortgage.
This is obviously not sustainable. Nor is the American way of life--built on ample room and a tight labor market--sustainable if immigration patterns continue as they are.


1 comment:

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