Affordable Housing Perspective
Sometimes someone punches numbers and they just hit you "no wonder" kind of thing.
I already did a post on housing affordability and directed people to where you can look at the actual study in my post "Affordability Survey - Housing."
Today I saw someone else's post on this study. He worked out that median house price in Vancouver would have to be $179,900 for housing to be affordable. I still had about $200k of debt on the home I just sold and had been in the housing market since 93 and had always paid extra on my mortgage except for the first year. If you consider that $180k gives housing affordability of 3.0 for house price to median income, and say consider that 25% should be the standard down for home purchase, well that gives a median mortgage of $135k meaning my mortgage was still 50% higher than a median affordable mortgage after 13.5 years of home ownership. So, I did have a very nice home, but it was a townhome, not a house and I did "move up" in my home choices. Certainly I'd have been debt-free with my aggressive payments had I stuck to my first home. My kitchen, living room, dining room, bathroom and a stair well made up my 450 sq ft main floor in that home. It was so tiny, I had to push my dining room table practically up against the hutch and if you pulled it out so you could sit on that side, there was no walk way past the dining room table...
I am very bearish on the market because I really think that the housing affordability issue plays out far worse than most imagine. Certainly that is based on my personal experience of buying into the market for the first time when affordability was around 4. Someone said that 40% have their homes paid off, but I am willing to bet these people tend to spend their money wisely. They have money to stimulate the economy, but that does not mean they will. They probably got to where they are by being thrifty.
I think consumption has to go down as people find themselves cut off from easy and foolish credit and as they find themselves with less home equity. There are probably about 5 million home owners with "no skin" in their homes right now, they owe more than their home is worth and these people are increasingly likely to walk away from their homes. I believe Calculated Risk has worked out that with a nation wide 20% decline in home prices you end up with about 10 million with zero or negative equity. When these people walk away they will again have disposible income. But, if you consider say an average $50k loss per foreclosure, that would be a half billion of losses to the financial markets.
Those that do not walk away will hardly be participating in the discretionary economy. With an affordability factor of 3.7 for the year before and now 3.6, well, there is simply a lot of people that live in a very tight financial place. Too many have been living far beyond their means and the credit correction happening means this is changing and I think it has a far bigger effect on the greater economy as reduced spending trickles down.
I just realised I don't know the quality of the homes overall in the survey. In Vancouver the square footage on homes is such that starting homes are well under 1000 sq ft, and tend to be one bedroom apartments in the 600-800 sq ft range. I suppose if the average home with the 3.6 affordability is a 2000 sq ft home there would not be the drive to upgrade. There's something to think about...
But then we had a better income to pay down mortgage and to upgrade and never borrowed to the point that there wasn't choices (our choice was to always pay back debt faster than required.) People have borrowed to the point they don't have choices so they can't dig themselves out.
Therefore I still think this whole housing mess hits the economy far harder and longer than people expect. I lived the financially tight life because of housing upgrades, others are living it because they've borrowed to their limit.