Let’s talk recession & affordability.

• Conference Board
• Economic/Business Research Organization
• 90-year old organization
• Consumer Confidence Index
• Leading Economic Indicators
• Their prediction: Continue to signal weak economic growth ahead but not a recession
• National Bureau of Economic Research
• Leading non-profit, private, economic research organization
• Predicts when recession occurs and ends
• Their prediction: 50% odds a recession will occur
• Mortgage Bankers Association
• National association representing the real estate finance industry
• Advocate for their members and promote fair and ethical lending practices
• Their prediction: Economic growth will continue to slow through the 1st half of 2008 and pick up in the 2nd half of 2008

I was talking to Mike Tacconi, former President of the California Mortgage Brokers Association, the other day and he told me that inflation is a concern – gold is up 15% so far this year and silver is at a 27 year high. Mike also has an interesing chart on his site about the effectiveness of economic stimulus packages.

At today’s Realtor’s Marketing Association meeting, Mike said that given the confluence of market forces, this is exceptionally favorable time for home buyers.

Affordability is, and always will be, the primary real estate issue. When affordability drops too low or too fast, a market correction has to occur – the number of home sales decreases and selling prices will ultimately drop.
The more dramatic the run-up in home appreciation, the steeper the decline in sales and prices will be at some point.

Affordability Index:  Measures whether or not a typical family could qualify for a mortgage loan on a typical home.

General Interpretation:

• Value of 100 means that a family with the median income has exactly enough income to qualify for a mortgage on a median-priced home
• Above 100 signifies that family earning the median income has more than enough income to qualify for a mortgage loan on a median-priced home, assuming a 20% down payment

Interpretation (2007):

• 112% – Means a family earning the median family income has 112% of the income necessary to qualify for a conventional loan covering 80 percent of a median-priced existing single-family home.
• 22% of income: The monthly mortgage payment is 22% of the median family income

3 factors that impact affordability:

• Income
• Home Price
• Cost of money: Interest Rates

The comparison of the median household income to the amount necessary to buy a median-priced home  (Standard affordability = 100%)

• 2004 – 124% (20% of income)
• 2005 – 112% (22% of income)
• 2006 – 106% (24% of income)
• 2007 – 112% (22% of income)

Affordability Is Always Felt Locally

• When the market shifts locally it usually shifts in a dramatic and rapid manner
• Local areas that have the greatest and fastest appreciation will typically deal with the most dramatic down shifts
• Affordability must be tracked in each metro and micro market – that is where sellers and buyers have to deal with the issues

Housing Opportunity Index – The share of homes sold in that area that would have been affordable to a family earning the local median income based on standard mortgage underwriting criteria. 

Two major components:

• Median Income
• Housing cost

Assumption: A family can afford to spend 28 percent of its gross income on housing.

• 30-year fixed rate mortgage
• 10% down payment
• Estimated property taxes
• Estimated property insurance

2007 Real Estate 2008

• Part 1
• Part 2
• Part 3
• Part 4
• Part 5
• Part 6

Click Here to Get In-Depth Local Real Estate Market Data - Updated Weekly

We’ll be seeing more and more headlines in the next few weeks around recession concerns. Funny how this seems to happen quite often just before an election. If I was a conspiracy nut, I’d be having a field day.

The concerns about inflation, a recession and the media play/hype/exposure that wll result will actually improve things for home buyers. All of these factors will most likely result in further downward pressures on housing prices and an increasing slowdown in home sales.

It should be interesting to watch the local trends for the next few weeks.

For the home buyer with secure employment and good credit, this will be a fantastic time to make a deal of a lifetime on a home – even first-time buyers (maybe especially first-time buyers).

Consider these factors:

• Interest rates will drop further as the Fed tries to stimulate the economy
• Rents are on the rise (see last weeks Sunday paper)
• Home Prices are falling
• First-time buyer programs have money, but the number of applicants is falling

While the pessimists moan and groan, the optimists will be able to make deals that lead to future laments of – woulda, coulda, shoulda – from those that want a risk free life.

There’s little risk in obtaining a mortgage you can afford. Base your mortgage on a worse case scenario of what you can afford.

Move up buyers feeling stuck by current market conditions should concentrate on the buy-end savings and not the sell-end price.