In the varied market that we currently reside in, keeping an eye on trends is crucial and sometimes the difference between profit and loss on the sale of a home. Investing in real estate is always a smart idea and this article shows that right now might just be a really great time to buy as homes are becoming more affordable.
Is the “affordability” of an Orange County home really well below average when a hiring spree slashed local unemployment to a seven-year low?
One big problem with the many so-called housing “affordability” indexes created by real estate insiders is that they don’t fully account for shifting strength or weakness in the broader economy. That’s especially noteworthy when Orange County is enjoying its best job market since the turn of the century.
The common affordability index takes current home price data and uses it to calculate a typical house payment based on recent mortgages rates, then compares that result to salary levels. But nowhere is the supply of that salary – the number of people employed – incorporated in the math.
So when an index reports that some hypothetical percentage of the population can afford a home, the only job market information being applied is income data – a rather static metric that isn’t a good measure of consumer confidence.
That means these indexes tend to show high “affordability” when rates and prices are low – and that often happens when the economy is soft, jobs are scarce and real estate fundamentals are poor.
Take this example: The California Association of Realtors’ (CAR) affordability index for Orange County was high during the real estate slump of the early 1990s, peaking in the first quarter of 1994 when it showed that 48 percent of Orange County households were comfortably able to purchase a home. And it rose sharply again during the Great Recession, hitting a cyclical peak of 35 percent affordability in the second quarter of 2009.
No MBA is needed to know that folks weren’t in a house-hunting mood in either of these eras – despite what an affordability index might show as favorable shopping conditions.
To my eyes, too much real estate analysis understates the job market’s huge impact on housebuying activities and property values. In an attempt to fix this statistical quirk, I fired up my trusty spreadsheet and filled it with CAR affordability data for Orange County, dating to 1991, and corresponding local jobless data.
Using relative differences in unemployment rates, I adjusted the CAR affordability rate for job market strength or weakness. Let’s dub my results Orange County’s house shopping “feasibility” index – that is, how many folks could be thinking about a home purchase based on job trends plus home prices, income levels and mortgage rate patterns.
The baseline of my feasibility index is the first quarter of 2010, when local unemployment hit its quarter-century peak of 10 percent. My formula left that quarter’s CAR affordability rate unadjusted at 28 percent.
Conversely, for 1999’s fourth quarter – with Orange County’s lowest jobless rate in a quarter-century, at 2.5 percent – my formula adjusted the CAR affordability rate of 32 percent up to an 83 percent feasibility rate. That’s the highest of any quarter since 1991.
What my spreadsheet is clearly telling me is that the late 1990s were a darn good time to be a homebuyer. Orange County’s booming business climate had yet to overheat the housing market – giving the ample number of employed people a solid shot at relatively reasonable homeprices.
Think about it. At the end of the last century, unemployment rates ran below 3 percent for much of 1998 and 1999. The resulting surge in housing pushed up the median single-family home price by 22 percent in those two years – only a fraction of their rise over the next five. Rates were sort of favorable: From 1994 through 1999, the average 30-year fixed home loan rate fell from 9.1 percent to 7.8 percent.
In 1999’s fourth quarter, Orange County house hunters bought 13,000 homes – roughly two-thirds more than the sales pace of the 1994 affordability peak, and twice as many were purchased during theaffordability high point of the Great Recession.
Plus, those buyers of the late 1990s were handsomely rewarded: median selling prices rose by 115 percent in the next five years.
Today, CAR’s affordability index tells you that only 22 percent of Orange County households could afford the median-priced house – a result well below the 28 percent average since 1991.
But when you look at the current market through my feasibility lens, you see that 64 percent of Orange County could have been thinking about buying in the first quarter of 2015 – a seven-year high, though just a touch above average.
Yes, today’s home prices are nearing the old pre-recession peak, and by many metrics, local housing is costly to typical families. That may scare off numerous house shoppers. But mortgages remain cheap and unemployment started the year averaging 4.7 percent – the best since the first quarter of 2008. (Local unemployment fell to 4.1 percent in April.)
So the numerous folks with new jobs – or those with solid prospects to keep their current ones – have a better financial outlook. Accordingly, homes were bought in the first quarter at the second-fastest start-of-the-year rate since 2007.
My feasibility index is by no means perfect, but it does remind you that if people are secure in their jobs, they won’t mind paying for real estate.
On the flip side, if they’re out of work, buying isn’t an option no matter how low rates are or how much property owners are discounting prices.
Sadly, most “affordability” measures simply don’t capture that house shopping reality.
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