We have the best housing affordability in at least 38 years, and the worst economy in 51 years. Hmm....The monthly cost of homeownership has fallen 43% from the peak in this cycle, with more than half of that due to the decline in price, and the remainder due to the decline in mortgage rates and increase in incomes. The median-income household, which earns $52,800 per year, only needs 25% of their income to buy the median-priced single-family home of $164,600. In July 2006, that ratio was 44%.
Those of us who are in the housing business know that the monthly payment is far more important than the price for entry-level buyers. Entry-level buyers compare the cost of homeownership to the cost of renting and have no idea what a Case-Shiller index means. Once the word gets out that homeownership is less expensive than renting, which is now also true in 54 of the 88 markets where we track this information, we expect buying activity to increase substantially (even in a horrible economy).
With the media so focused on price, we thought it would be appropriate to share the change in payment. We calculate the housing-cost-to-income ratio for major metro areas across the country assuming a 20% down payment, a fixed-rate conforming mortgage, and full amortization of the down payment over 7 years (the typical length of homeownership). In the Oakland, CA MSA, housing costs in this cycle have plummeted from 84% of income to 28%, a decline in monthly payment of 67%. The California and Southwest markets have shown the greatest correction, while the Texas markets, with consistently low housing-cost-to-income ratios, have shown less improvement.
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