Housing affordability is boogeyman making the American dream tougher

A
tent city for the homeless in downtown Reno,
Nevada.
Max
Whittaker/Getty

• Home sales in the US are slowing, and the boogeyman is
  affordability. 
• Americans are spending the most money in almost a
  decade on mortgage payments as a share of their incomes,
  according to Morgan Stanley. 
• Economists have been expecting home prices to
  eventually slow, but the market isn’t budging. 

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More evidence of a
slowdown in the housing market came through this week.

The latest data on sales of new and existing homes slowed more
than economists had expected for a second straight month. During
three quarters out of the past four, there was a decline in
residential investment, which includes construction and
brokers’ fees.

Since the rest of the economy — particularly the job market — is
in solid shape, it’s not the unwilling of buyers that’s slowing
housing down. 

“If there’s a boogeyman in the housing market today, it’s
affordability,” James Egan, Morgan Stanley’s co-head of US
housing strategy, said in a note on Thursday. By one measure —
the S&P CoreLogic Case-Shiller Home-Price Index — housing
costs have jumped 21% since they bottomed after the recession in
February 2012. 

“As home prices and mortgage rates have risen, it logically
follows that homes have become less affordable.”

The chart below offers proof of how much strain the housing
market is creating. It shows that Americans are paying the most
in monthly mortgage payments relative to their incomes since
2008. And it’s no wonder a University of Michigan survey of
consumers earlier this month found that home prices were deemed
the least favorable in 12 years. 

“The only housing market indicator that has moved decisively
higher in 2018 has been prices: Everything else is flat,” Aaron
Terrazas, a senior economist at Zillow, said.  

Morgan Stanley

Egan has more sour news: He doesn’t expect prices to fall,
although he thinks the rate of growth may slow. That’s still not
happening for most of the market, however. In June, the
CoreLogic index showed that home prices rose at the fastest
annual rate in four years and have
not fallen for 14 straight months. 

Still, it’s more likely a matter of when, not if affordability
improves. Price growth is already slowing in the luxury housing
market, where there aren’t as many people giving competing offers
to sellers, according to Zillow. 

“We believe that the current supply and demand environment will
continue to push home prices higher, just at a decelerating
pace,” Egan said. 

Another promising thing, particularly for those worried about
another housing crisis, is that lending standards are much
tighter than during the most recent housing bubble. According to
TransUnion, the share of homeowners who made mortgage payments
more than 60 days past the due date fell to 1.7% in the second
quarter, the lowest since the housing crisis.

However, fewer qualified people are choosing to
take out mortgages.

“This shift is likely due to a combination of historically tight
underwriting standards coupled with rising home prices
putting pressure on home affordability, particularly at the
entry-home level,” Joe Mellman, a mortgage business leader at
TransUnion, said.  

“In fact, homeownership rates continue to remain far below recent
historical averages.”

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