Posted By: Matthias Paul Kuhlmey
… Back from my regular visit to one of the Toll Brothers Sales Offices over the weekend (fun!) − and as you may expect, “business is great, and we (they) are more than 75% sold …” (this, however, has been the common statement over the past 2-3 years, but enough of that). Whereas there is certainly momentum in residential real estate, among widespread optimism, it is worthwhile to “dig deeper,” or to lay the foundation as we “talk bricks.” An interesting aspect to consider is the so-often-cited “affordability” of real estate, apparently best in more than 40 years, according to a recent statement released by The U.S. Department of Housing and Urban Development (HUD).
What does “affordability” actually mean? Now be prepared for a good one; the NATIONAL ASSOCIATION OF REALTORS® affordability index measures whether or not a typical family could qualify for a mortgage loan on a typical home. We spare you the detailed definitions of what family, mortgage, typical home means, but fast forward on how to read the index: a value of 100 means that a family has exactly enough income to qualify for a mortgage on a median-priced home, whereas an index above 100 signifies that a family has more than enough income to qualify for a mortgage loan, assuming a 20% down payment. According to a prominent financial blog, “as hard as this might be to imagine, it (the index) shows that over the course of the biggest run up in housing prices in American history, the Index remained perfectly affordable. Except for one monthly reading of 99.55 in late 2005 − a smidge below 100 − housing never dipped into the level of unaffordable over the entire giant housing boom.” Voila. Yet another interesting aspect is that “affordability” is still very much linked to leverage, meaning an 80% mortgage is being considered in the concept of purchase. In other words, buyers of domestic real estate can “tap” into inexpensive money as so graciously provided by B&T (Benny and Team) to buy something they actually cannot afford. A lesson to distinguish between ownership and “cost of carry” has to be learned – this is nothing else but the distinction of “renting space” vs. “renting money”. I recall from my days in European banking (Germany) that customers would make a 40-50% down-payment, and finance little – interesting to consider that Germany throughout the booming years never had a housing bubble.
Now, the real picture: “A new study released by the Center for Housing Policy in Washington, D.C., confirms falling home prices haven’t solved the housing affordability problems for working households. The center’s Housing Landscape 2012 report found the share of working households paying more than half their income for housing rose significantly – from 21.8% to 23.6% – between 2008 and 2010 for renters and owners.” As reported yesterday in the latest Case-Schiller report, home prices fell in 18 of 20 cities for the fourth consecutive month in December. The S&P Case/Shiller Home Price Index slid 3.8%, ending 2011 at the lowest levels since mid-2006. What a turnaround (wink, wink).
You may wonder why we are not commenting on the market – it just looks too suspiciously like last year: Equities up, Bonds up, Oil up, everyone super optimistic, clapping hands (the recovery is here) … Apple owns the world; this morning, however, we received word that the Eureopan Central Bank (ECB) has loaned 529.5 billion Euro (USD 715 billion) to European Banks – not small change. If the world is “healed”, what’s up with this?
Yes, we know, the market needs a breather – but please recall our earlier statement: “As long as buyers of GDP are available, stay constructive on equity markets.” Even if markets are fully priced, we may see a massive inflation trade in the making; this will be a problem later, but, for now, pretend we are “75% sold”.