With home prices down from the big bubble and rates down as well, I was curious about the current state of housing affordability.

The latest stats I find show median household income at about $52,000 (2008). With rates at 4.5% or lower on a 30 year fixed mortgage, and a conservative underwriting, 28% of income for the mortgage and property tax, we’ll assume 24% is for the mortgage only. This is $1040/mo. At 4.5% this will fund a $205,000 mortgage, so with 20% down, a total house price of just over $250,000.

This graphic shows lower median home prices in all regions except the Northeast where income tend higher as well. Take that median income and you can afford a pretty nice home in the south or midwest.  Makes me wonder if we hit bottom, and if this is the time to buy. Of course, bottoms are really only seen in hindsight. For an interesting spin on the rent/buy decision, check out Monevator’s Reasons to buy a house instead of renting.
Joe

written by JOE \\ tags: Finance, home sales, Real Estate

This is a Money Mavens Network post, the first of many to come. This time, a number of the Mavens will be writing on the topic of using a Real Estate broker to sell your house. (We’ve not seen each others’ posts before publishing, so any similarities are purely from the category of “great minds thinking alike.”)

photo credit: Atelier Teee

A few years ago, pre-crash, a neighbor put his house on the market. When it sold within two days of being listed, I found it odd that he seemed so happy with himself. I told him,”sorry, but I think you got Freaked.” I told him that I had read the book Freakonomics, and was recalling a chapter that discussed the conflicting motivation that a real estate broker had. The author cites a study that showed, all things being equal, an agent will sell his or her own home for an average 3% more than the same home sold for a client.  It turns out that when selling your home, an additional $20,000 may be quite a bit of money to you (as it is to me) but on a 6% commission, that’s $1200. Once it’s split between the listing agent and yours, and your agent splits half with her office, it’s a $300 difference. I went on to explain to my not-happy-as-before neighbor that the very fact that it sold so quick should make it obvious the price was set too low. In his case, the Zillow estimate was nearly $30,000 higher than his sale price and I thought he’d have at least split that difference had he set the listing price higher. Of course the agent’s economic interest was best served by a fast sale. I won’t even try to calculate the hourly return the commission brought her. In the end, the impact to my neighbor was far greater than the 6% listing fee. On a lighter note, this was a neighbor I wasn’t sorry to see move, a bit of schadenfreude, I suppose.

Recently when a friend told me she was putting her house up for sale, I walked her through the story above, explaining the math, the 1.5% of the increase/decrease in price being all the agent gets and leaving her with the warning that the agent is not her friend. To be fair, real estate agents are in a better position to move a house than most of us might be. Buyers are coming to them, and through MLS and their own networks have access to more information than you or I might. On the other hand, the internet along with market pressure is fast eroding that advantage.

Check out my fellow Mavens posts as well:
Len Penzo -  Real Estate Agents: Why You Rarely Get What You Pay For
The Financial Blogger at Green Panda Treehouse – Would You Take A Realtor To Sell Your House?
Tom at Canadian Fiance Blog – Should You Use A Real Estate Agent To Sell Your House?
Paul at Fiscal Geek – Should I Use a Realtor to Sell My House?

Joe

written by JOE \\ tags: freakonomics, money mavens network, Real Estate, realtor

Recently, Jim at Bargaineering authored an article titled Your Home is Not an Investment. Looking at data gathered by Michael Bluejay, we find that the price of new homes increased by 5.4% annually from 1963 to 2008, on average. During that same period, inflation averaged 4.4%, so housing rose faster, no? Well, not so fast, the size of new houses also grew during that time, from 983 sq ft to 2349 sq ft, or 1.6%/yr on average. On a same size comparison, this means housing has lagged inflation by about .6%/yr.
When was the last time you heard of someone buying a house and leaving it unoccupied, hoping for a positive return? Me neither. What’s missing from Jim’s post is the rent saved by an owner occupied house, or the rent received by the landlord of a rental unit.
Where does that leave us? I’ll suggest that you not count on rising real estate values as part of your long term plans. On the other hand, as retirement approaches, a plan to either downsize or move to a less expensive area (or both, of course) can free up some needed money.

Joe

written by JOE \\ tags: inflation, Mortgage, Real Estate

Sounds like an oxymoron, I know. But ever since grad school, a lifetime ago, when I read a book called “How to Lie With Statistics,” I’ve seen some fun in it. I recently read Thomas J. Stanley’s blog where he posted an article titled Average Rich or Median Poor? In it, he discusses that median (the middle number of all observed) household wealth is but a fraction of average household wealth, about 1/5 or so. This goes to illustrate the concentration of wealth in this country.

On a different note, today I wanted to talk about median home prices.

Let’s look at this chart, the 12 months ending June 2009. On the news they’ll tell you home prices are down 15% from a year ago. But does that really mean anything? Think about this. Does the drop you see from June until January even mean anything? Not much to me, anyway. The number graphed here is the median sale price for home sales in the given month. In an economic crisis, the kind we are in the midst of, it would stand to reason that higher end homes would not be enjoying the turnover the lower priced ones would see. See where I’m going with this? The numbers charted do not discuss same home value, only the value of observed transactions. Say there’s a town of mostly $500K homes, with little turnover, everyone there is pretty happy and the houses are not for sale. A builder comes in and with everyone’s approval builds nice homes, a bit smaller, and they sell for $400K each. Even though the $500K houses lose no value, and may very well start to sell for $550 or more, the transactions at $400K are the ones that hit the data and the median sale is that $400K. This is just one way the numbers get distorted and the facts presented by the media, while true, still don’t tell the whole story.

Joe

written by JOE \\ tags: economic crisis, median home prices, median sale price, oxymoron, Real Estate

Back in July I saw this telling graphic on the Times’ web site:

It would appear we are looking at a 30 year fixed rate nearly 1.5% higher than the low of 2003. Let’s compare the above to the 10 year Treasury chart below:

It’s clear that mortgage rates did not follow the Treasury’s recent rate decline due to the subprime issues. Looking at the impact on home purchases, I calculate that the $1380/mo payment that would finance a $250K loan at 5.25% will now only support a $213K loan at 6.71%. This is nearly 15% less purchasing power due to interest rates. I’ve remarked in the past that the rise in home prices (by that I meant median home prices) did not show any bubble forming. In two articles I wrote, aptly titled Housing Bubble and Housing Bubble Part 2, I offer charts showing wage and interest rate adjusted cost of home ownership, and from the late 80′s right to 2004 showed no decrease in affordability at all.

Joe

written by JOE \\ tags: affordability, Credit, credit crunch, Finance, home ownership, housing bubble, interest, interest rates, loan, Mortgage, Subprime

A while ago, the New York Times offered an interactive graphic,

which allows you to enter all the variables you need to determine whether you come out ahead buying vs renting. You are able to enter the price for the house, rent of a similar house, down payment, interest rate on your mortgage, along with the assumed increase in home value or monthly rent. Note: you may click on the image above to be taken to the Times’ web site.

Joe

written by JOE \\ tags: Home, home value, interest, interest rate, Mortgage, new york times, Renting