Whether property managers and their clients will continue to see vacancies drop and rent prices go higher will be partly dependent on how easy it is for people to buy instead of rent. The big U.S. banks are reporting an improving number of applications for mortgages as the housing market searches for a bottom and interest rates hit new all-time lows. But despite the resiliency in mortgage applications, lenders are keeping standards high for borrowers to qualify. As unemployment rises that situation becomes more problematic. The big question remains, “Are the worst days of the housing and mortgage crisis behind us?” That’s not an easy question to answer with a high degree of certainty. The increase in loan demand is encouraging, but economists are still saying this is a “gradual housing sector recovery.”
One sign that sooner than later it will be more affordable for those who need housing to buy than to rent involves the “Home Affordability Index.” It’s signaling that this is one of the best times to buy a home in over 20 years. The chart below (courtesy of Dr. David Eifrig’s “Retirement Millionaire” newsletter which is a Stansberry Research Publication and I subscribe to and recommend) clearly demonstrates this phenomenal situation we are witnessing.
“The chart above shows the Housing Affordability Index, which measures what percentage of income a median-income family would need to spend to buy a house. Any time the index falls to less than 100, it indicates a family would need 50% of their gross income to buy a home. Above 100, the percentage decreases. So the higher the index, the more affordable housing is.”
No doubt about it, based on that index it’s virtually never been less expensive (based on a percentage of income) to buy a home. In fact in all the years that the National Association of Realtors has been tracking home prices (since 1970) this is the first time the index crossed above the 200 level. It’s telling us that the median-priced home would take only 13.5% of the income of the median-income family. The conundrum though is whether the “median-income family” can qualify for a mortgage in a timely manner. In a recent survey by the Federal Reserve 93% of loan officers surveyed said standards for approving mortgages to borrowers with strong credit were unchanged from the prior quarter.
More disturbing was that 95% said standards were unchanged for small business borrowers with less than $50 million in annual sales. That leaves most small business owners in double-trouble…they may not be able to qualify for a home mortgage and they’ll have an even tougher time borrowing money to operate their businesses. As I’ve reported before, banks have been cautious about implementing the Home Affordable Finance Program, an Obama administration program to facilitate refinancing of mortgages that are “underwater” or where the mortgagee can’t afford their existing principal and interest payments.
Most banks won’t participate unless they hold the loans, and most mortgage loans are quickly sold to Fannie Mae and Freddie Mac, who are now government agencies. So it’s like a good news and bad news joke. The good news is that it takes less of our income to buy a home and finance the debt associated with the purchase. The bad news is that millions either don’t have enough income or are finding the mortgage application process like dancing in quicksand. The bottom-line for the time being is that more folks will have to keep renting or go back to being renters that at any time in the past 20 years or more.