Affordability a 'C-': Are we nuts?

John Burns

Before I get into our affordability calculations, let me explain the methodology behind all of the grades below.

1. We collect a complete history on 70-plus variables and forecast the important ones by forecasting each metropolitan statistical area (MSA) and rolling it up.

2. In this monthly e-mail, we publish the current stats along with the historical minimums, maximums and averages as a service to the industry.

3. Each indicator is graded based on a bell curve where an "A" is its historical best, a "C" is its historical average, and an "F" is its historical worst. The grades are designed to provide a simple tool for decision-makers to scan the data.

4. Each of the eight categories has a grade that is nothing more than the average of the grades under it.

Our affordability grade is a "C-", which on the surface looks absolutely ridiculous. With an "A-" for our JBREC Affordability Index (we recently renamed our Housing Cycle Barometer) and an "A+" for mortgage rates, one might think that affordability analysis should stop there.

However, only 50 percent of new-home buyers traditionally are coming out of an apartment. The other half need a downpayment. Here is what is weighing down our overall grade:

• Equity: Average equity in a home is $82,471, which is a "D-" (our grades use current dollars to account for inflation over time)
• LTV: Loan-to-value of 62.5 percent is an "F" because of the historical norm of 34.5 percent (this statistic includes the almost one-third of all homeowners who do not have a mortgage), and
• Income Growth: Incomes have declined 3.9 percent in the last year, which is the worst year on record.

What does this mean? Affordability has rarely been better for an entry-level buyer, and affordability has rarely been worse for the many potential move-up/move-down buyers who bought or refinanced their home in the last decade. With this knowledge, and hopefully some more detailed analysis at the local level, you can make great decisions for your business.

Economic Growth: D+

Economic growth has begun to improve compared to last month, and we are seeing signs that job losses are nearly over.

The preliminary fourth-quarter GDP growth rate skyrocketed to 5.7 percent, compared to a final value of 2.2 percent in the third quarter. Much of the growth was the result of recent government stimulus and an increase in inventories.

The pace of job losses also eased this month, although in the last 12 months the U.S. has lost 3.94 million jobs, which is equal to a decline of 3 percent of the total payroll workforce. Unemployment fell unexpectedly compared to last month to 9.7 percent, while the broader measure of unemployment, the U-6, also fell to 16.5 percent.

Mass layoff events -- defined as a cut of 50 or more jobs from a single employer -- also eased to 1,726 this month, and have fallen 30 percent compared to one year ago. Job seekers are finding it increasingly difficult to find employment, as the amount of time required to find work is currently double the historical average.

The consumer price index, or CPI (all items), increased again to 2.7 percent from one year ago, while the Core CPI (minus food and energy) also rose to 1.8 percent.

Leading Indicators: C

Leading indicators rose this month for the most part, yet the pace of improvement has begun to ease.

The December Leading Economic Index six-month growth rate increased to 10.8 percent after declining for the past two months, and remains very high compared to history. ...CONTINUED

All rights reserved. This content may not be used or reproduced in any manner whatsoever, in part or in whole, without written permission of Inman News. Use of this content without permission is a violation of federal copyright law.