| Affordability Should Be a Top Concern |
| Written by Jonathan Smoke | |
| 06.08.2007 | |
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Discuss this article on the forums. (0 posts) We can debate when this market overall will hit bottom. Have we hit it already? Or, will we hit bottom sometime this fall, end of 2007, or into 2008? This of course is important to every player trying to drive sales in this tough environment. One thing is for certain during this downturn and even into the next up-cycle: affordability is now one of the industry’s biggest concerns. While home prices have cooled their rapid ascent in many markets and even declined in some, median incomes have not kept pace. Even if house price appreciation falls to historical levels and grows less quickly, it is not likely to fall rapidly such that affordability improves. The following housing markets are the least affordable in the U.S.:  The index displayed is the Affordability Index from Moody’s Economy.com and reflects the median income and median home prices in each market at the end of 2006. A score of 100 would represent that the median income household could just afford the payments on a median priced home with a traditional mortgage of 80% principal. So, as you can see, these 30 markets are already well below 100—the median household cannot afford homes by traditional means in these markets. Couple affordability challenges with tighter credit standards as a result of the subprime meltdown, rising interest rates, and a general trend against the usage of adjustable rate, interest only, and “teaser rate” products because of not so robust home price prospects, we have a perfect storm for the large number of new home buyers near median income levels.  These affordability challenged buyers are not low-income transients. They are the lifeblood of America, including teachers, fire fighters, blue-collar workers with families, and young professionals. The challenge to affordability will drive them to higher density choices or further out locations where land is cheaper for new homes. The alternative is to fall back into or remain for some time in the group of households who rent.The builders and developers who are thinking ahead are already working on this challenge, but there are no easy answers. Further out subdivisions add commute times to often already overloaded roads. Not to mention that fuel prices may make that less of an alternative. Density, when you can find tracts to develop or redevelop, often faces NIMBY opposition from existing home owners. And these projects tend to take much longer to get through entitlement and development. The alternative, trying to move upstream to move up and upscale buyers, is not an easy move. Products are more expensive and complex to build, customers are more sophisticated and harder to please, and these markets are often already well served. There are no easy answers to the affordability challenge and wishing or just guessing isn’t likely to work any more. 
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