Housing is Not as Affordable as Many Think

04/05/2014 05:36 PM (CST)

poorThe latest pre-crash housing bubble was a lot “bubblier” than many of us thought. Even after the bubble has burst, a big part of the U.S. housing is still unaffordable to many Americans, despite a wide-spread (or, rather, well-advertised) conviction that real estate is more affordable than ever.

According to the report released by Zillow, which was based on analysis of income, mortgage and home value data in the 4th quarter of last year, more than half the homes currently on the market in seven major American metros are currently unaffordable for local residents. Furthermore, one-third of homes currently listed for sale are unaffordable by historic standards.

So, are mortgage banks and analysts being truthful when they assert that real estate is more affordable than ever and this is the best time to buy in one’s lifetime? They may be right about the second part of this statement: it’s very unlikely that we’re going to see housing prices go down significantly any time soon. This, however, doesn’t mean that we won’t be experiencing another bubble and it certainly doesn’t mean that the housing is affordable.

For instance, Californians fear that another bubble is just around the corner. According to real-estate website Trulia’s first-quarter “Bubble Watch,” the top two overvalued housing markets in the country are Orange and L.A. counties.

Climbing prices, combined with low inventory, is causing worry for some would-be home buyers, concerned about the possibility of another bubble.

According to the California Association of Realtors, the median home price in L.A. County was $390,000 for February 2014 – up 15.2 percent from the same period last year.

In Orange County, the median home price last month was $677,000, up 11.6 percent.

The numbers show affordability has also dropped.

Only 30 percent of L.A. County residents can afford a median price home, down from 44 percent last year. In Orange County, it’s down to 20 percent from 34.

Nationally, homebuyers increasingly have to search on the perimeter of the country’s largest metro markets, as downtown properties become out of reach for buyers of typical means, the report found.

This should not come as a surprise. Housing prices and the behavior of housing market mirror the trends of economy and wealth distribution in general. It’s a widely known, yet often ignored, fact that 400 wealthiest Americans control 62% of wealth in America. In other words, the 400 wealthiest Americans own as much wealth as 80 million families – 62% of America.

The poorest 47% of Americans have no wealth whatsoever; meaning their debt exceeds their assets.

By comparison, in 1983 the poorest 47% of America had $15,000 per family, 2.5 percent of the nation’s wealth. In 2009 the poorest 47% of America owned zero percent of the nation’s wealth.

No doubt, housing is not as affordable as it seems. To make things worse, as mortgage interest rates rise along with home values, affordability will worsen, and buyers will need to spend ever-larger shares of their incomes to buy increasingly expensive homes.

Home buyers making the median income in Los Angeles, San Francisco and San Jose should already expect to pay a larger share of their income today toward a mortgage than during the pre-bubble years.

Zillow expects mortgage rates on a 30-year, fixed-rate mortgage to reach or exceed 5% by the first quarter of 2015.