Before I get into our affordability calculations, let me explain the methodology behind all of the grades below.
1. We collect a complete history on 70-plus variables and forecast the important ones by forecasting each metropolitan statistical area (MSA) and rolling it up.
2. In this monthly e-mail, we publish the current stats along with the historical minimums, maximums and averages as a service to the industry.
3. Each indicator is graded based on a bell curve where an "A" is its historical best, a "C" is its historical average, and an "F" is its historical worst. The grades are designed to provide a simple tool for decision-makers to scan the data.
4. Each of the eight categories has a grade that is nothing more than the average of the grades under it.
Our affordability grade is a "C-", which on the surface looks absolutely ridiculous. With an "A-" for our JBREC Affordability Index (we recently renamed our Housing Cycle Barometer) and an "A+" for mortgage rates, one might think that affordability analysis should stop there.
However, only 50 percent of new-home buyers traditionally are coming out of an apartment. The other half need a downpayment. Here is what is weighing down our overall grade:
- Equity: Average equity in a home is $82,471, which is a "D-" (our grades use current dollars to account for inflation over time)
- LTV: Loan-to-value of 62.5 percent is an "F" because of the historical norm of 34.5 percent (this statistic includes the almost one-third of all homeowners who do not have a mortgage), and
- Income Growth: Incomes have declined 3.9 percent in the last year, which is the worst year on record.
What does this mean? Affordability has rarely been better for an entry-level buyer, and affordability has rarely been worse for the many potential move-up/move-down buyers who bought or refinanced their home in the last decade. With this knowledge, and hopefully some more detailed analysis at the local level, you can make great decisions for your business.
Economic Growth: D+
Economic growth has begun to improve compared to last month, and we are seeing signs that job losses are nearly over.
The preliminary fourth-quarter GDP growth rate skyrocketed to 5.7 percent, compared to a final value of 2.2 percent in the third quarter. Much of the growth was the result of recent government stimulus and an increase in inventories.
The pace of job losses also eased this month, although in the last 12 months the U.S. has lost 3.94 million jobs, which is equal to a decline of 3 percent of the total payroll workforce. Unemployment fell unexpectedly compared to last month to 9.7 percent, while the broader measure of unemployment, the U-6, also fell to 16.5 percent.
Mass layoff events — defined as a cut of 50 or more jobs from a single employer — also eased to 1,726 this month, and have fallen 30 percent compared to one year ago. Job seekers are finding it increasingly difficult to find employment, as the amount of time required to find work is currently double the historical average.
The consumer price index, or CPI (all items), increased again to 2.7 percent from one year ago, while the Core CPI (minus food and energy) also rose to 1.8 percent.
Leading Indicators: C
Leading indicators rose this month for the most part, yet the pace of improvement has begun to ease.
The December Leading Economic Index six-month growth rate increased to 10.8 percent after declining for the past two months, and remains very high compared to history. …CONTINUED
The ECRI Leading Index — an indicator of future U.S. growth — fell in January, yet remains near its highest level in 77 weeks. The index at the end of January increased 21.5 percent year-over-year, its fifth largest growth rate on record since ECRI began tracking that statistic in 1968.
Stocks ended their upward streak in January, yet all four major indices we track have posted positive year-over-year results ranging from +15 percent to +36 percent.
The S&P Homebuilding Index also improved in December.
The spread between corporate bonds and the 10-year treasury fell in December, declining to 150 basis points after peaking at nearly 270 basis points in March. Since the 10-year treasury is seen as a risk-free investment, the spread between corporate bonds and the 10-year treasury displays the perceived risk of investing in corporate bonds, which has declined recently as Wall Street has become less worried about businesses failing.
According to the fourth-quarter CEO Confidence Index, CEOs are now much more confident about the economy. Confidence as of the fourth quarter is now approaching early-2007 levels. The survey of CEOs revealed that 84 percent expect their profits to either remain flat or increase in the next 12 months, and 87 percent of CEOs plan to keep the same number of employees or increase the number of employees over the next year.
Affordability: C-
This month, affordability worsened as a result of a slight increase in home prices and a slight rise in mortgage rates. However, our housing-cost-to-income ratio remains at just 27.2 percent, and housing affordability remains excellent compared to history. Affordability is so good that owning the median-price home is now nearly just as affordable as renting the average apartment — a difference of just $54 per month.
Household income has fallen 3.6 percent year-over-year to $52,817 as a result of large job losses and government furloughs. Despite the recent steady drop in incomes, the median-home-price-to-income ratio remains just slightly above the historical average at 3.4.
The 30-year fixed mortgage rate increased slightly to 4.98 percent by January month-end, while adjustable mortgage rates fell to 4.29 percent. The Fed’s overnight lending target rate remains at a range of 0 percent to 0.25 percent, which is the lowest level on record. The share of adjustable-rate mortgage (ARM) applications increased to 4.5 percent by the end of January, which is a significantly smaller share than the peak level of 35 percent of total applications in early 2005.
Consumer Behavior: D
Consumer behavior improved once again this month. Consumer confidence increased in January to 55.9 yet remains well below the historical average of 97. Consumer sentiment improved this month as well to 74.4 — also low compared to the historical average.
The Consumer Comfort Index rose to a monthly average of -44.5 in December.
The personal savings rate of 4.8 percent increased compared to last month, yet is down from the recent peak of 6.9 percent in May.
The U.S. net worth has increased quickly over the past two quarters due to improvement in the stock market, but has fallen $3.4 trillion within the past year. The Misery Index also increased this month due to an increase in inflation.
Existing-Home Market: D+
The existing-home market weakened this month. The seasonally adjusted annual resale activity plummeted to fewer than 5.5 million homes in December, according to the National Association of Realtors. This is a decline of 15 percent year-over-year, and a drop of 16.7 percent since last month.
Despite the seasonally adjusted decline, on a rolling 12-month basis sales have improved for six consecutive months, increasing 1 percent this month and 4.9 percent year-over-year.
The federal tax credit was set to expire on Nov. 30 until it was ultimately extended to spring 2010. This led to a surge of buyers closing by November, and in December the rush to close was lost. …CONTINUED
The national median price of an existing single-family home spiked to $177,500 in December, up from $169,300 in November. The recent increase led to a 1.4 percent year-over-year gain, and marks the first positive growth rate since July 2006.
The Case-Shiller national index, which tracks paired sales, improved in the third quarter, and the monthly 10- and 20-market composite indices both declined compared to last month for the first time since April 2009. Although the indices remain down year-over-year, the rate of decline continued to ease.
The number of unsold homes rose to 7.2 months of supply in December, rising above the historical average.
Pending home sales volume inched upward in December, and have increased 11 percent year-over-year.
As of the third quarter, 23 percent of all homes with a mortgage throughout the U.S. were worth less than the balance of the mortgage.
New-Home Market: D+
Overall, the new-home market worsened compared to last month. Builder confidence fell again one point in January to 15, and seasonally adjusted new-home sales volume also fell in December to 342,000 transactions, declining 9 percent year-over-year.
The rolling 12-month total through December also fell this month to 373,000 transactions, tying the all time record low, previously set in July 1982.
The median single-family new-home price rose to $221,300 in December, but has fallen 3.6 percent year-over-year.
The inventory of unsold homes increased for the second consecutive month to 8.1 months of supply, and the volume of new homes for sale remains flat at 234,000 homes, which is the lowest volume since April 1971.
Repairs and Remodeling: D-
Conditions for residential repairs and remodeling were weaker than last month. Homeowner improvement activity fell in the third quarter, representing a drop of 9.4 percent year-over-year. The Remodeling Market Index increased in the third quarter to 39.8 and has rebounded after bottoming out in the fourth quarter of 2008. Despite recent increases, the index remains well below the historical average of 50.
Residential construction has fallen 19 percent year-over-year as of November, yet the pace of decline has eased.
Housing Supply: F
In general, housing supply has declined compared to last month. Total completions fell to 768,000 this month, representing a 25 percent year-over-year decline.
Seasonally adjusted new-home starts also fell in December, due to a 7 percent drop in single-family starts. Multifamily starts increased 12 percent since last month, yet remain down 38 percent from one year ago.
Seasonally adjusted total permits increased to 653,000 this month, representing an increase of 11 percent compared to November, but a decline of 16 percent year-over-year and have fallen nearly 74 percent since its most recent peak in September 2005.
Although vacancy rates in the U.S. have improved in recent quarters, the majority of the U.S. remains oversupplied compared to history. Just five states in the U.S. are currently undersupplied: New Mexico, Oklahoma, Wyoming, South Dakota and North Dakota.
John Burns is the founder of Real Estate Consulting in Irvine, Calif., which monitors changes in real estate market conditions and provides consulting services, including strategic planning, market research and financial analysis. He can be reached at jbrec@realestateconsulting.com.
Copyright 2010 John Burns
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