Housing Affordability Index to Set Annual Record

The National Association of Realtors (NAR) gave America some goods news and bad news yesterday. The good news is that, in 2012, homes were more affordable than any other time since 1970. This is very great news and needs to be cheered. Although it came on the back of historically declining home prices and historically low interest rates, it is a good thing that homes are coming in line with median family incomes.

Now, the bad news. In 2013, the NAR predicts this indicator to fall 19% from its current rate of 198.2 to 160. This is really bad news seeing that the housing affordability index is "based on the relationship between median home price, median family income and average mortgage interest rate." What does this mean? In 2013, the NAR is predicting either home prices to rise, median family incomes to decline, or mortgage interest rates to increase or some negative combination of the aforementioned variables. The last two outcomes, a decrease in the median family income or an increase in mortgage interest rates, would not bode well for the development of a healthy economy.

The NAR's response to this expected decline was interesting.  "NAR President Gary Thomas said the minor erosion in affordability conditions moving forward could be mitigated by bank and regulatory policies.’Clearer rules from the government regarding future lawsuits and buybacks of Fannie and Freddie loans could encourage banks to use their massive cash holdings to originate more loans,' Thomas said.

'A more sensible lending environment that makes it easier for other financially qualified buyers to get a mortgage would allow many more households to enter the market, boosting home sales as much as 10 to 15  percent,' he added."

So the NAR believes that if our government eases its law enforcement efforts and be more definitive in its buyback procedures, then banks will lend more and, as a result, homes will become more affordable? I do not agree with this notion. I do agree that if banks make more money available for lending, this would create downward pressure on interest rates, however, as it did in early 2000s, increasing the money available for lending would also increase home prices by generating more potential homebuyers. This is called increasing the demand for housing. And if the increase in the money available to borrowers did not kick start demand for homes, Mr. Thomas has a followup suggestion. Mr. Thomas says financial institutions should open up lending to "other financially qualified buyers to get a mortgage" and "allow many more households to enter the market". This would certainly do the trick.

But, Mr. Thomas himself agrees that his suggestions would increase demand. In the article he said his suggestions could boost "home sales as much as 10 to 15 percent". However there is not comment on how this increased demand would have a negative effect on housing affordability. 

Relaxing government enforcement of US laws, increasing the amount of money available to borrowers, and decreasing the lending standards on borrowers, haven't we heard this before? While there is a discussion concerning what can be done to counter the upcoming pressures on home affordability, let me give a suggestion. The home affordability index is based on three variables, median home price, median family income and average mortgage interest rate. Since the US Federal Reserve Bank has shown no stomach to raise interest rates anytime soon, I am going to assume mortgage interest rates are going to remain historically low for yet another year. So that only leaves me the ability to make recommendations on how to keep median home prices down or how to increase median family incomes. Currently, I am not a supporter of declining home prices, due to their historically low rates, so I am not going to suggest a way in which to decrease home prices even further. This leaves only one variable left, and that is median family income.

My suggestion to counter the anticipated decrease in home affordability is not the government to ease its law enforcement efforts, but for our government to concentrate its efforts on, not job creation, but (I am going to coin a new word here) "American Dream" creation. Instead of them putting deficits first, put "American Dreams” first. Increase one’s ability to achieve their "American Dream" and you will increase the median family income. Increase the median family income and you will increase the ability of everyday American families to afford a home.

http://realtormag.realtor.org/daily-news/2013/01/09/housing-affordability-index-set-annual-record