Real Estate Market

Home prices fall, but so does spending power

(3/1/2012) ERATE Exclusive - Who wouldn't buy hundreds of single-family homes if they could?

It was cake for business magnate, investor, and philanthropist Warren Buffett to recently tell CNBC, "I would load up on hundreds of them (single-family homes), if I could manage them. It's a way, in effect, to short the dollar. It's a very attractive asset class now."

With some home prices half what they were at the height of the market and interest rates at record lows, affordability does make housing a better investment deal than many stocks, Buffet said, appearing on CNBC's Squawk Box with Becky Quick.

That's especially true for first time home buyers.

Buffett said, "If I knew where I was going to want to live in the next five to 10 years, I would buy a home and finance it with a 30-year mortgage. It's a terrific deal. It's a leveraged way of owning a very cheap asset right now. It's as an attractive investment as you can make right now."

In theory.

Warren's loaded. He can speculate about speculating all the way to the bank.

But for many households, it just doesn't matter that home prices have fallen or that interest rates are low.

Banks are tight fisted and the same economy that has pushed down interest rates and depressed home prices has also pounded incomes.

In fact, shrinking incomes are outpacing falling homeownership costs and renters face an even greater housing-cost dilemma.

From 2008 to 2010 housing costs fell 2 percent, but household income fell more than twice as much, by 5 percent, according to the Center For Housing Policy's (CHP) "Housing Landscape, 2012."

What's more, renters saw rental housing costs rise 4 percent over the period, while their household incomes dipped as much the other way, by 4 percent.

What "affordability?"

Despite so-called "housing affordability gains," the report found that the share of working households paying more than half their income for housing rose significantly between 2008 and 2010 for both renters and owners.

Jeffrey Lubell, CHP's executive director said this phenomenon for homeowners was primarily due to a drop in average hours worked among moderate-income homeowners. For renters it was rising rents and reduced income.

"The data show that homeowners have been hit hard by the housing crisis in more ways than just lost equity. Many working homeowners have been laid off or had their hours cut," Lubell said.

The report examined U.S. Census data from 2008 to 2010 on housing costs and income from the 50 largest U.S. metropolitan areas, all 50 states and the District of Columbia.

Nearly one in four working households in the U.S. spends more than half of their total income on housing.

Report author Laura Williams said, "More and more people are interested in renting. Some prefer it because it allows them to be more mobile in a tough job market. Others are postponing purchasing a home or facing difficulties obtaining a mortgage. Given the long lead times involved in responding to increased demand with increased supply, the rental market has tightened somewhat and rents increased."

The report also says, the housing costs of most working homeowners are still tied to the cost of homes bought before the sharp drop in home prices and thus do not reflect today's lower home purchase prices.

"Most of today's homeowners bought their homes at a time when housing prices were much higher than they are today. As a result, their housing costs have not declined nearly as much as you would expect from looking at the broader market declines in home sale prices," Lubell said.

The study also found:

• The share of working households with a severe housing cost burden increased significantly between 2008 and 2010, rising from 21.8 percent to 23.6 percent.

• Between 2008 and 2010, the share of working households with a severe housing cost burden increased significantly in 24 states and decreased significantly in only one state: Maine. Eight other states that saw no significant increase in the percentage of such households already had steadily high rates of severe housing cost burden.

• Among the 50 states and the District of Columbia, the following five had the highest share of working households with a severe housing cost burden in 2010: California, 34 percent; Florida, 33 percent; New Jersey, 32 percent; Hawaii, 30 percent and Nevada, 29 percent.

• Among the 50 largest metropolitan areas, the following five metropolitan areas had the highest share of working households with a severe housing cost burden in 2010: Miami-Fort Lauderdale-Pompano Beach, FL, 43 percent; Los Angeles-Long Beach-Santa Ana, CA, 38 percent; San Diego-Carlsbad-San Marcos, CA, 37 percent; Riverside-San Bernardino-Ontario, CA, 35 percent and New York-Northern New Jersey-Long Island, NY-NJ-PA, 35 percent.

"Since the 1960's, home prices have historically been equal to about three times the median annual household income and approximately 20 times what a home would yield in gross rents for a year. If you want to determine where home values stand now relative to the historic norms, start with these metrics," said Nancy Osborne, Chief Operating Officer of ERATE, a Santa Clara, CA-based financial information publisher and interest rate tracker.

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