https://www.wsj.com/economy/housing/to-make-homes-affordable-again-someone-has-to-lose-out-ce397bdd?st=9s1Pn7&reflink=desktopwebshare_permalink

Seems like a tough hill to climb.

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According to an analysis by Realtor.com, one of three things would need to happen to bring affordability back to 2019 levels.

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I'm listing these in order of these actually happening in my mostly unprofessional opinion:

1. Home prices have to fall 35%, based on the Realtor.com analysis.

This seems like the most likely thing to happen. Home prices are already falling in my market, but to fall 35% is a huge number.

2. Or, mortgage rates would have to fall to 2.65% to give home hunters the same buying power they had in 2019, which is very unlikely outside of a major recession. Lower rates could also be counterproductive unless there is a corresponding increase in the housing supply, as cheaper borrowing costs would be capitalized into higher home prices.

Seems farfetched at this point. Not the recession but getting rates that low again.

3. If home prices and mortgage rates remain stuck where they are today, a 56% increase in the median household income to $132,000 is needed to return affordability to where it was six years ago. Wages are rising faster than home values, but it would still take around a decade to inflate incomes to this level.

Not happening.

Generally I agree but their framing eliminates consideration for the following...

The median income earner doesn't HAVE TO buy the median house by value. Housing values are necessarily based on transactions (a house doesn't have real value if it's not on the market from a data standpoint). So if the median income earner purchases disproportionately below median house value, then the median house value will have to be impacted lower because of the distribution of transactions below the current median.

So that all depends on the supply of lower cost housing compared to the median. They're out there, that's been documented ad nauseam - the problem is they're often in places people don't want to live.

So a 4th option to buy down exists that will impact affordability metrics (by moving the median home value down). The trade off is expectation of what the median income earner thinks they can afford. The reality is the last couple decades of unnatural interest rates have moved the median home value much higher than it should have been. First because of inflationary impacts but also because supply and demand issues where marginal borrowers were able to reach much higher on the value chain than they would have been otherwise thus skewing the median upward compared to median income.

This seems to go back to supply though. You said it yourself the affordable supply are in places that no one wants to live and this is generally due to two factors (1) Distance from jobs and/or (2) Crime. Affordable supply in desirable neighborhoods in urban cores is practically nonexistent.

Good points and I also think this is new normal. None of those options seem realistic in the near-term. The only reason I think prices could drop a decent amount at some point is simply because the boomers buy/sell/own much of the RE and as they start dying or moving into assisted living arrangements more supply will get unlocked.

YouBet said:

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This seems to go back to supply though. You said it yourself the affordable supply are in places that no one wants to live and this is generally due to two factors (1) Distance from jobs and/or (2) Crime. Affordable supply in desirable neighborhoods in urban cores is practically nonexistent.

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Yeah, absolutely agree with you though I did use want to imply an emotional decision and not an empirical one the article claims that it would be.

It's valid though. Boomers have a ton of wealth, and they are helping heirs to get in expensive homes and then they as they start moving on their own RE gets passed down to heirs. (FTR, I'm not making this a boomer bashing topic - just pointing out the reality of the residential RE market).

My Silent Generation parents are pushing the envelope of living on their own right now. When they go to an assisted living arrangement, which my brother and I think is going to happen within a year or so, we will have two houses to deal with: (1) the new home they just built as 82 yr olds (dumb) and (2) the house they left that hasn't sold that has had 2 soft leads in about 9 months.

We will sell both of them. The one they left we will likely sell at a discount and piss off their neighbors. Don't care; we have no cost in it and it's in a remote albeit badass neighborhood. The current home we will be able to get market for it.

just went through the same thing with my parents. $5K a month for independent living eats up the equity pretty quickly though.

Diggity said:

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just went through the same thing with my parents. $5K a month for independent living eats up the equity pretty quickly though.

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Oh yes. My FIL's memory care was $8k+ per month. Woof.

We should get somewhere between $1M-1.2M for both the homes and that will be their money to fund their new living arrangements. They have another $1M in retirement which they never really touched because they've been lived off other RE passive income (rental homes) and proceeds from sale of them.

Casey TableTennis said:

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Young Americans also could demand smaller homes with less amenities, in less desirable areas. I believe this is the most likely lever to help, but it is slow.

A huge part of lack of affordability over the last few decades is the increasing rise is taste, size, and function.

Tiny home markets are expanding, and sqft on new builds have come down, so some positive trend exists.

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I want a smaller home as a 52 yr old. My ideal home is a one-story actual Ranch House (because that term gets thrown around for pretty much any one story these days) that is less than 3,000 sq ft.

Diggity said:

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Casey TableTennis said:

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Young Americans also could demand smaller homes with less amenities, in less desirable areas. I believe this is the most likely lever to help, but it is slow.

A huge part of lack of affordability over the last few decades is the increasing rise is taste, size, and function.

Tiny home markets are expanding, and sqft on new builds have come down, so some positive trend exists.

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sounds like a recipe for success

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Yeah, that's DOA.

I do think there is some market for a smaller home that still has good amenities. That's what I want.

What are we qualifying as "smaller homes?"
Less than 1800 SQFT

2000 to 2500 SQFT?

Less than 1600 SQFT?

MS08 said:

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What are we qualifying as "smaller homes?"
Less than 1800 SQFT

2000 to 2500 SQFT?

Less than 1600 SQFT?

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Likely subjective. For me, it would be 2000-2500 because of certain functions we would want that you likely aren't getting in anything smaller than that. We are currently in a two story 3,500 which while beautiful is overkill.

Heineken-Ashi said:

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I bleed maroon said:

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I consider this a pretty flawed analysis on the face of it. Do the same study based on 50-year averages, and I bet you get a different result. They're comparing to the absolute peak of housing affordability (2019) where these likely unrepeatable confluence of factors existed:

• All-time low for mortgage rates (less than half the long-term average)
• Low materials costs (mostly due to a prime operating world economy with few trade barriers)
• Low, low inflation rates
• Stable worldwide economy, with reasonable GDP growth everywhere
• Low construction labor costs with a large base of workers (documented and undocumented) to draw on
• Benign government regulatory oversight and favorable tax policy
• Relatively low raw land costs

I'm not saying it will NEVER return to those conditions, but I'm 98% confident it won't. This is probably the new near-term normal, which is not that different from the long-term normal. Consumers have a good memory, and they do use 2019 as a comparison point, but they'll slowly adjust to this new status quo, in my opinion (and near-term more people will choose to rent, as a result, which is not as bad as talking heads like to say it is).

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It's not flawed at all.

Home affordability is a product of price rising far more than wages. Anything to correct it other than sharp wage increases or sharp price decreases is lipstick on the pig or more fuel for the fire.

This only ends one way. Just a matter of when. Real estate is cyclical. Always has been. Always will be. There are times to buy, and times to not. Sure, there circumstances where someone might find a great deal, get a promo rate from a builder who has no choice but to throw out anything they can simply to move product nobody wants, etc. But for the average American, home ownership won't be possible until price corrects. If price doesn't correct, then the correction will happen with a widening of time and real estate will be flat for many years while wages catch up. But that would literally be a first following a period of record unaffordability.

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I'm not exactly sure what you're arguing against?

I think we agree that housing is much less "affordable" than it was in 2019. I'm saying that that timeframe was a sweet spot we haven't seen probably since the 1950s, if then. And we may not see it again until 2075, if ever. The premise is flawed because it treats 2019 as the "norm", when in reality, it was a huge outlier. Look again at my factors, and tell me I'm wrong. The other items discussed by others, including inflated sizing of homes, exacerbate this situation.

Now the political angle (from all sides of the political spectrum) of treating affordable home ownership as a God-given American right is another element altogether, which I also submit is flawed (even if it's socially desireable), because it's supported by non-economic factors. These include deductibility of mortgage interest, favorable regulation of homebuilders and homebuilding, massively subsidized interest rates (FHA, VA, low-income specials, etc.), and the like. If the natural market ebbs and flows dictated pricing, people would engage in more economically proper and rational rent-seeking behavior, including ironically, renting at greater rates.

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The premise is flawed because it treats 2019 as the "norm", when in reality, it was a huge outlier.

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Yes, we agree overall. But you are missing the biggest components - the overall money supply, the massively underwater FED balance sheet, and historically high levels of existing debt in the system.

No other time in history has a system this bloated simply shrugged, gone sideways, let incomes catch up, and then keep going.

The entire system is debt fueled. And the banks can't even lend to borrowers because they would be putting money at risk for a marginally higher return than simply parking it at the FED. And nobody is demanding loans because they can't afford loans. It's not because of the rate, it's because of the principal.

Housing affordability corrects only one way. Just a matter of when.

Heineken-Ashi said:

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Quote:

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The premise is flawed because it treats 2019 as the "norm", when in reality, it was a huge outlier.

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Yes, we agree overall. But you are missing the biggest components - the overall money supply, the massively underwater FED balance sheet, and historically high levels of existing debt in the system.

No other time in history has a system this bloated simply shrugged, gone sideways, let incomes catch up, and then keep going.

The entire system is debt fueled. And the banks can't even lend to borrowers because they would be putting money at risk for a marginally higher return than simply parking it at the FED. And nobody is demanding loans because they can't afford loans. It's not because of the rate, it's because of the principal.

Housing affordability corrects only one way. Just a matter of when.

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I thought so! Actually, I think it's much simpler than your issues listed. It's simply current over-spending relative to revenue that's the REAL culprit. If you balance the budget, the rest can theoretically work itself out over time. Of course, your issues are directly related to this, I think we'd agree.

I just want beach houses in Galveston/Surfside to go back to their 2019 levels. Looking at the price history on some of these properties is insane with how much they have gone up.

I think patience on home buying is important. If you are a cash buyer, now is a great time to build. Material costs have come down quite a bit over the last year.

If you are looking for a housing crash, it is very possible in my opinion. The median household income to house price ratio is way out of whack and has been for awhile. It has been fueled by ultra low interest rates that we might not see for awhile. Eventually, something has to give.

While we might not see an implosion like 2008 (which was due to prostitutes using ARMs for 800k houses), there could be a slow bleed downward.

Another factor is insurance rates going nuts. Speculation into VRBOs with much higher insurance could sink that investment market in housing.

Keep that powder dry.

Captain Winky said:

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I just want beach houses in Galveston/Surfside to go back to their 2019 levels. Looking at the price history on some of these properties is insane with how much they have gone up.

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Last time I looked at Zillow it looked like the entire island was for sale.

The problem with building is what once took 8-10 months is now pushing 14-16 months.

Everyone trying to exit the local VBRO market

Well prices haven't dropped that much considering the large supply.

YouBet said:

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https://www.wsj.com/economy/housing/to-make-homes-affordable-again-someone-has-to-lose-out-ce397bdd?st=9s1Pn7&reflink=desktopwebshare_permalink

Seems like a tough hill to climb.

Quote:

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According to an analysis by Realtor.com, one of three things would need to happen to bring affordability back to 2019 levels.

---

I'm listing these in order of these actually happening in my mostly unprofessional opinion:

1. Home prices have to fall 35%, based on the Realtor.com analysis.

This seems like the most likely thing to happen. Home prices are already falling in my market, but to fall 35% is a huge number.

2. Or, mortgage rates would have to fall to 2.65% to give home hunters the same buying power they had in 2019, which is very unlikely outside of a major recession. Lower rates could also be counterproductive unless there is a corresponding increase in the housing supply, as cheaper borrowing costs would be capitalized into higher home prices.

Seems farfetched at this point. Not the recession but getting rates that low again.

3. If home prices and mortgage rates remain stuck where they are today, a 56% increase in the median household income to $132,000 is needed to return affordability to where it was six years ago. Wages are rising faster than home values, but it would still take around a decade to inflate incomes to this level.

Not happening.

I vote for option 1.

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P.H. Dexippus said:

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Everyone trying to exit the local VBRO market

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I don't doubt it. Our neighborhood is a second home hood with decent number of VRBO / Airbnb. There were a ton of homes on the market last time I looked. Nothing existing is really selling that I can see, but we do have new builds on the empty lots and a lot of reno.

Granted some of the new builds are spec homes.

52 and definitely looking to downsize in next 8 - 10 years.

Edit to add: That's always been the plan anyway when building our current home that's larger than we'll need then (when our kids are out of the house) in an expensive area. However, with our extremely low interest rate and lots of equity ...the numbers might make it more sensible to stay in the larger, more expensive home when that time comes.

Captain Winky said:

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Well prices haven't dropped that much considering the large supply.

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Part of this is boomers, sorry y'all. They have been brainwashed into thinking that real estate is an investment and God forbid it if they don't double their investment when they want to sell it. A lot of this is realtors too, trying to pump up commissions for themselves. (This is my firsthand experience with my parents, their house, and a "popular" realtor in the area FYI)

I hate to say it, but this market system we have has only really worked out for 2 generations so far, so it's not like it's the end all, be all for success.

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A lot of this is realtors too, trying to pump up commissions for themselves.

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What does this mean? A house is worth what the market says it's worth.

permabull said:

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I don't think prices will go down but they will likely stop going up as fast and eventually interest rates will come down and we will start the cycle all over again.

I also think my generation and younger have historically above average expectations on how nice our first homes should be. The starter homes people in the 80s were buying on a single income with a family weren't very Instagram worthy.

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This kinda stuff makes me chuckle.

Those starter homes are worth half a million now and are hard to afford for a lot of people with two incomes.

Also I wonder what the old people were saying in the 80's to all these youngsters buying their first homes. "Young people these days want too much. Every house has to have air conditioning and indoor plumbing or they won't even consider it!"

MAS444 said:

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A lot of this is realtors too, trying to pump up commissions for themselves.

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What does this mean? A house is worth what the market says it's worth.

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I would assume he's suggesting that realtors are inflating above the general buyer's willingness to pay to maximize their commissions. This would suggest that the realtor is not desperate enough to need money themselves, or some has other reason as to why they don't want to price it to sell.