Saturday, April 26, 2008 Average Joe Still Can't Afford a Home

This is the quandy I've been pointing out multiple times... with a "normal" mortgage, with a "normal" down payment, many people are still priced out of most major urban areas, even with this first wave of price reductions. [What Should Median Home Prices be Today?] This is why homes still need to go down substantially in many (not all) areas.... the lowering of wages through a move to "service economy" only exaggerates the issue. Now here is the interesting story developing. As home prices closer to major cities got out of reach, the working class (teachers, policemen, et al) moved farther and farther away... this way they can still have their 2500 sq foot house, offset by a 45 minute, 1 hour, 1 hour + (especially in CA) commute. Now those same people need to deal with $4 gas. Uh oh. What breaks? The GM Volt can't get here quick enough....

I continue to say the best thing for middle class America is a sharp reduction in home prices; while the period of downward adjustment would be painful - a lower price level and lack of speculation keeping home prices permanently "low" with just mild yearly appreciation would allow people to save.
  • Normally, you'd think dramatically falling prices would make homeownership possible for more moderate-income families. But even with homes more affordable, the median price in many markets is still out of reach for a median-income family.
  • Comparing housing costs in 210 metropolitan areas with the wages earned by workers in 60 occupations, the study found that homeownership is often unaffordable for workers in each of the five-fastest growing occupations -- registered nurses, retail salespeople, customer-service representatives, food-preparation workers and office clerks. Registered nurses, who typically have high salaries, were unable to purchase a median-priced home in 108 of the markets. (think about that for a minute, other than nurses are we happy that the other 4 categories are America's fastest growing type of jobs? Not exactly the type of jobs that create a move up and out of middle class)
  • "Even with the housing downturn, the drop in prices still just isn't enough for many workers in traditional backbone occupations to afford houses," says Rebecca Cohen, a CHP research associate.
  • In many parts of the country, housing increases have outpaced wage growth for almost a decade. Census data released in 2006 revealed that between 2000 and 2005, the burden of housing costs grew sharply.
  • That's because the median price of a home in 2000 was $139,000, but by June 2007 prices peaked at a whopping $229,200. In those seven years, the median price of homes increased 64.9%, while median incomes rose just 16.6%.
  • The study also found that retail salespeople and food-preparation workers couldn't afford to rent a two-bedroom apartment in any of the markets. (but those are our fastest growing type of jobs???)
  • Recent mortgage innovations and Americans' appetite for debt have created the illusion that homes are affordable and within reach of anyone, regardless of income. But just because a family purchases a house doesn't mean they can afford it, and those who borrow as much as they can may have to make other budget cuts that affect their financial futures. (yes, I like that word... illusion)
  • The fact that a bank says you can afford a home doesn't necessarily mean you can, Barakat says. A lender is concerned about an applicant's ability to repay debt; it has no interest in whether there's enough money left for the borrower to send children to college or to invest for retirement. Many homeowners fail to recognize this and buy homes at the expense of other liquid assets and investments. (goes back to the crisis that is our national financial illiteracy)
  • For the first time since the Great Depression, Americans have a negative savings rate of 4%. It's been captured or stolen by high mortgage payments," says Barakat.
  • Cutting back on outings and vacations may decrease the fun in life, but saving less and putting away less for retirement also increases financial risk.
  • Sean Snaith, director of the Institute for Economic Competitiveness at the University of Central Florida, says affordability evaporated in some areas that saw rapid price increases over the past five years. In many parts of the country, home prices have risen to such levels that many middle-class residents have little choice but to move farther outside the city, increasing their commutes.

Again I apologize for dropping in these pieces of reality into the blog. If I were a good financial pundit I'd simply say "everything will be fine in 6 months, rebate checks coming next week, everything is so rosy I can almost cry." So please enjoy and smell the roses along the way, the boom is soon here.

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