Feb292012
Housing costs burdensome relative to incomes
Since early last fall, I noted increasing affordability relative to rents. It’s now cheaper to own than to rent in many OC markets and most housing markets around the country. However, rental parity is a measure of affordability comparing one method of providing housing versus another. Rental parity does not capture the bigger picture of affordability relative to incomes. As it turns out, all housing is becoming less affordable as both owners and renters alike spend more on housing as a percentage of income than they used to. This is a troubling trend.
If people are putting more toward housing, then they are spending less on everything else. Perhaps landlords and bankers like this trend, but people who produce other goods and services are seeing less spending coming their way. To make matters worse, incomes declined in the wake of the 2008 financial crisis, and with high unemployment, workers don’t have the leverage to demand more. Flat incomes and increasing housing costs are squeezing the economy, and these problems will likely persist for the foreseeable future.
Despite Falling Prices, Housing Burden Still High for Middle Class
February 24, 2012, 10:43 AM By Alan Zibel
Though home prices have fallen dramatically as a result of the housing bust, paying the monthly cost of owning or renting a home hasn’t become any easier for many middle-income Americans families, a new study finds.
The study released Friday by the Washington-based Center for Housing Policy calculates the burden of housing costs for homeowners and renters with incomes of up to 120% of the median in their area by analyzing U.S. Census data.
Nearly 24% of those 45 million households spent more than half of their incomes on housing (including utilities) in 2010, up from about 23% in 2009 and 22% in 2008, the study finds. (It remains to be seen whether this trend will continue given the improving economic climate over the past six months.)
“Despite the fact that we’re seeing declining home prices across the country, housing isn’t becoming more affordable,” said Laura Williams, the study’s author and a research associate at the policy organization. The report noted that in 19 of the 50 largest U.S. metro areas the number of households with high housing cost burdens actually increased between 2008 and 2010.
It stands to reason that housing costs as a percentage of income would rise during a period of falling wages. People can’t and don’t reduce their housing expenses quickly in the face of declining wages. Loan owners are stuck with their housing costs and can’t reduce them even if they want to. Renters have more control over their housing costs, but even renters will tighten their belts and stay were they are if they believe the decline in income is temporary.
Why? There are several reasons. Due to the rough economy, incomes for many families have fallen. The median household income of renters analyzed in the report fell to $30,229 in 2010 from $31,570 in 2008. For homeowners, the median household income fell to $41,413 in 2010 from $43,971 in 2008.
Meanwhile, rents have been rising. Plus, many homeowners haven’t been able to take advantage of record-low mortgage rates by refinancing their mortgages. That’s because they are “under water” – meaning that they owe more on their properties than the value of their homes.
The cost push of increasing rents is prompting many to buy homes. The clients Shevy and his team are working with all tell him the rising rents and lower cost of ownership is prompting them to lock in a lower housing cost through purchasing property with a fixed-rate mortgage.
The metro area with the largest share of households paying more than half of their income on housing was Miami, where 43% of households did so. It was followed by Los Angeles (38%), San Diego (37%), Riverside, Calif., (34%) and New York (34%).
It should surprise no one that people in Southern California are putting an onerous portion of their incomes toward housing.
The cities with the smallest share of households with a severe cost burden were Pittsburgh (15%), Buffalo (16%), San Antonio (17%), Rochester (17%) and Kansas City (17%).
Read the full report.
The following are the key findings of the report:
- The overall share of working households with a severe housing cost burden increased significantly between 2008 and 2010, rising from 21.8 percent to 23.6 percent.
- The increase in the rate of severe housing cost burden among working households occurred exclusively for those earning less than 80 percent of area median income (AMI).
- The incomes of working renters and working owners with severe housing cost burdens differ.
From the report: “As shown in Figure 4, nearly all working renters with a severe housing cost burden earn less than 50 percent of AMI while working owners with a severe housing cost burden are more evenly distributed across income categories. This difference is likely due to the fact that there are relatively few very low-income owners and that moderate-income owners are more likely to struggle to meet housing costs than moderate-income renters.”
Increasing burdens among loan owners crosses all economic classes, but only low-income renters are facing huge housing burdens. In other words, many of the readers of this blog are among the wise minority controlling their housing costs.
- Since 2008, affordability has steadily eroded for working households in 24 states.
- Nineteen of the 50 largest metro areas saw the number of working households with severe housing cost burdens increase between 2008 and 2010.
- Fewer low- and moderate-income households have jobs that employ them for 20 hours or more per week.
- Incomes for all households, working and not, have declined since 2008.
- Since 2008, there has been a steady trend in decreasing costs for owners and increasing costs for renters.
The decreasing costs for owners is for new owners. Even those loan owners who received loan modifications and pay less today are still paying 31% of their income toward housing costs. Rents did fall from 2007 through 2009, but they have been rising since then.
What has happened to your housing costs over the last few years?
Nice high voltage power lines there right behind the place. This is ‘fairly valued’ eh?
Man, what is in your water out there?
I agree. Part of what gets lost in the analysis is that poor locations like this one appreciated to levels they never would attain in a normal market. Who in their right mind thinks it is acceptable to pay $500k to live under power lines? When did comps start ignoring that being in the same area doesn’t necessarily mean that you are truly comparable? Maybe the houses a few blocks removed from the power lines are $500k, but this one shouldn’t be. Same goes for the insane Irvine prices where backing up to Alton/Irvine Center Drive/Jamboree/etc. is somehow inconsequential.
couldn’t you landscape around the power lines?
The average OC residents net worth is less, incomes are less and so the amounts they can leverage will be less. Fact: deleveraging = debt-based asset values negative.
Clearly, we have a long, long, long way to go to revert to norms….
http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2012/02/20120229_delev2.png
FHA Raises Insurance Premiums
The Federal Housing Administration (FHA) has seen its capital reserves quickly dissipate over the past few years amid a growing number of mortgage defaults and payouts on insurance claims. In an effort to bolster its capital cushion, the federal agency has announced a new premium structure for FHA-insured single-family mortgage loans.
FHA will increase its annual mortgage insurance premium (MIP) by 0.10 percent for loans under $625,500, effective for new loans insured by FHA beginning in April. The agency is increasing the annual MIP by 0.35 percent for loans above that amount, effective in June. Upfront premiums (UFMIP) will also increase by 0.75 percent, beginning April 1. Existing borrowers who are already part of an FHA insurance program will not be impacted by the pricing changes.
Acting FHA Commissioner Carol Galante says the agency’s premium increases will help to encourage the return of private capital to the housing market, as well as protect FHA’s capital reserves.
FHA’s Mutual Mortgage Insurance Fund slipped below the congressionally mandated threshold in 2009 for the first time in the agency’s history (going back to 1934), and it has fallen farther and farther ever since. The FHA insures lenders against defaults on home mortgages, and this fund pays for any losses the agency may have to cover.
“These modest [premium] increases are one of several measures we are taking towards meeting the congressionally mandated two percent reserve threshold, while allowing FHA to remain a valuable option for low- to moderate-income borrowers,” Galante said.
FHA estimates that the increase to the upfront premium will cost new borrowers an average of approximately $5 more per month.
HUD Secretary Shaun Donovan stood before a Senate subcommittee on Tuesday and presented testimony on deficiencies in the foreclosure process and the recently announced settlement between state and federal officials and the nation’s largest mortgage servicers.
Inevitably, questioning from lawmakers turned to FHA’s financial state and Donovan was asked directly if the federal mortgage insurer would be the next big bailout shouldered by taxpayers.
Donovan assured the senators that the agency was taking steps to avert such action. He said the new premium changes for FHA insured mortgages would allow the agency to increase revenues and contribute more than $1 billion to the depleted Mutual Mortgage Insurance Fund through fiscal year 2013.
There will be another increase after the election.
I think this is pretty significant. In the 625k+ category it would seem like going from say 4% to 4.35% annual cost, quite a difference for buyers who buy whatever they can afford in terms of monthly payment. Plus the UFMIP increase.
It also seems to set a precedent that our political overlords are forced to accept gradual reductions in these subsidies. As Mike said will it happen again after the election? And again the year after?
Irvine Renter,
A question for you. In your monthly report from the “Orange County CA median home prices” graph it seems that we have reached the bottom with the prices bouncing around near the bottom before they start rising. But in “market general overview” you say that prices will continue to fall for a while. Can you please clarify?
I believe house prices will fall despite stronger fundamentals because lenders still have a lot of supply to process. For the first time in the last 10 to 15 years, affordability is not the limiting factor in the OC market, supply is. If were didn’t have such a large overhang of shadow inventory, I would say we were at the bottom, but unless lenders manage to pack all the shadow inventory into bulk sales and hold them off the market for a few years, the weight of this supply should push prices lower.
Credit Cards are now replacing HELOC’s as “Free” Money
By Mike at North Orange County Housing News
Unlike a HELOCs, which gave s0me loan owners up to $250,000 of credit and then the lender tried to collect after the house was worth nothing, credit cards will cut you off must faster. But it’s interesting that total consumer debt is still increasing. We keep hearing that economy has turned around. Could one of the major factors been the increase in consumer debt and this “growth” is not real but debt fueled like the housing bubble?
MORE
Total consumer credit is increasing mostly due to student loans. Revolving credit continues to decrease. Ironically, since US bankruptcy laws were changed in 2005, student loans in-default are no longer dischargeable. That means for each such BK that occurs, the individual will be non-bankable for at least a decade+ = 1 less prospective home buyer. Sad really.
“Sad really.”
This is a point that you and I can both agree on.
From the post….
“Both revolving debt and non-revolving debt increased. Revolving debt, which is credit-card debt, went up by 4.1 percent. Non-revolving debt, which includes loans for cars and education, rose 11.8 percent, the central bank’s report said.”
I think the revolving debt decrease reversed last quarter.
The question is that are we having economy growth or is just debt fueled growth?
Auto loans are the major source of subprime lending these days (excluding FHA). Ever hear that commercial on the radio “Your job is your credit!!!”? Give them an eight year car loan and it makes 8% interest seem affordable. Then if they don’t pay, send Bruno to repo the car and keep their down payment. No pesky lawyers and no robo-signing issues to hold things up. God bless America.
“The question is that are we having economy growth or is just debt fueled growth?”
Sadly, I don’t think the fools at the federal reserve make any such distinction. Our policy makers embark on one Ponzi scheme after another, mis-allocate our resources, and then try to prevent the cleansing recession from making things right.
This article was very much needed, thank you.
Every day this site exclaims “the median is below rental parity!” which is a solid factor to consider but I feel other indicators are often ignored. Income has been falling for quite some time, yet rents barely slowed at all. Fuel, utilities, food, insurance have all continued to rise as well. Something has to give.
You did a great job seeing the “bigger picture” in the initial real estate bubble fiasco, lets not ignore the bigger picture here now. Perhaps your mindset has changed some with your investing opportunities, but there’s more to this equation than rental parity.
I’d love to see some more analysis on rents, since its such a heavy influence on our motive to purchase. How have OC rents scaled over time with income and inflation?
Thanks again for the daily analysis and I apologize if any of this is incoherent, I’m in the throws of a major winter cold.
I particularly like rental parity because it compares the alternatives facing each family. Since few will opt to sleep in the street or in their cars for nothing, each family must chose to either rent or buy. I liked today’s article because it points out these choices both take a bigger bite out of the family budget than they used to.
In the absence of a recession, it is very unusual to see rents go down. Perhaps the new rental supply coming to the market will change that, but the only other way rents go down is if the entire society decides they want to spend less on housing. I don’t see that happening either.
Perhaps over time the rate of income growth will exceed the rate of rent growth, and rents will be a lesser portion of personal income than it is today. Ordinarily this would happen coming out of a recession, but I don’t see that happening this time.
I like that my home state of North Dakota is at 11%, maybe I should buy some more property there and cap rates are still circa 8%!
“Even those loan owners who received loan modifications and pay less today are still paying 31% of their income toward housing costs.”
Reminder — HAMP 2.0 is going to allow 1st & 2nd combined DTI’s to be modified down to 10%.
And the administration is clamping down by capping the number of HAMP mods granted to one borrower at FOUR mods. No fifth modification for you buddy!!
Quick question: in some of your house analyses you assume the 20% down conventional, in others the FHA 3.5%. How do you decide which one to use?
In my daily posts, I use whichever seems more appropriate. Generally, sales under $400,000 are FHA, and sales above this figure tend to be conventional. There are exceptions of course, but I try to create an analysis most likely to be used by the prospective buyer.
Great stuff. I view the tightening coming from both ends.
Housing expenditure in OC has always been nuts (for me since Feb 2005) e. As a renter I was paying $2600/mo when I got here for a SF 4 bed 2.5 bath, and this got jacked to $2975 by the time I bought a home in late 2010. Really dumb.
The other end is that food and gas are getting ridiculous expensive now. Thanks Iran saber-rattlers and unseasonable cold European mother nature! I think the destruction of the US dollar and real inflation (not the new happy adjusted index that takes out food), is making matters a lot worse for OC residents (renter or homedebtor).
I mean, shit, just look at the price of basic staples like bread, eggs, milk and cheese (not govt cheese). We’re not quite Weimaring it, but I do have a wheelbarrow jnow ust in case I want to buy a loaf of pumpernickel.
Wait…your rent went up 14% in 5 years, or 3% a year, and that strikes you as nuts? I mean, at less than 3% a year that’s clearly lower than inflation, meaning the real cost of your rent was falling.
Meanwhile unless you were lucky the value of your 2010 purchase declined by 10% last year, which means you lost, oh let’s say about $45,000, or about $3750 a month over continuing to rent. That sounds…expensive.
I realize it may nevertheless make lots of sense for you, but the bare numbers you gave don’t seem to suggest that. I’m curious why it comes out differently for you.
Probably because his wages stagnated while everything else has gone up.
My advice, live way below your means.
We are opening escrow on our first house and my front/back end ratio is going to be below 15%/20% (goal is to pay house off in 7 years if possible). I see a lot of my family and friends in professional jobs are all loading up with huge mortgages (justifying this by the current low rates) and ratios probably in the 30/40’s and will likely be a slave to their mortgage for the next 20-30 years. They live in near empty houses, drive nice cars on leases, and take little if any vacations. That is not the life I want to live.
At last somebody that really gets it 🙂
Assets that depended on long term credit instruments before the Great R in the USA ( Great D2 in England) are deflating and probably will continue to do so regardless of “inventory supplies shrinking.” No bank is going to extend money to a working-class debtor for 30 years unless they know they will make money when ( not if, but when) they repo the property and find another sucker with lots of down payment money. Consumers not securely entrenched in the solid middle or upper Middle-Class without at least two earners would be wise to avoid loans for amounts more than one earner can cover and for loans extending beyond 15 years if at all possible. And it is always “possible” (for example, think modular). For the Working-Class a 30 year debt instrument for a median priced home is financial suicide today. The volatile nature of the American workplace and stagnant wages for the majority are going to be the end of long term mortgages, with or without ever higher down payments, even for what is left of the middle Middle-Class.