Affordability Isn't Enough for Some Buyers

Difficult credit conditions and economic uncertainty are keeping would-be buyers on the sidelines.

November 1, 2010

Amid all the news coverage about how the housing market is still in the tank, there’s one piece of news that seems to have escaped the notice of most commentators: Housing is at its most affordable level in several decades. 

And because of very low mortgage rates (the average 30-year fixed rate was at a record low of 4.3 percent at the end of September), the monthly mortgage payment for a median-priced purchased with FHA-backed financing is $1,150, down from $1,658 in 2006, at the height of the boom. 

Of course, like all things real estate, affordability is local. While some markets have seen small price declines or no declines at all, other markets, such as Las Vegas, have had major drops.

On a national basis, though, now is clearly a good time to buy for those who are willing to stay within their budget. But the extent to which households take advantage of today’s buyer’s market is influenced by a number of factors, not all of which are in their control.

The first factor is whether buyers can access credit for their purchase. Today, even successful self-employed entrepreneurs are facing hurdles because they don’t have W-2 forms to show lenders.

Second, buyers won’t buy if they think they’ll get an even better deal in a few months or a year. Although home values have largely stabilized in the past 18 months, some buyers believe prices are going to fall further. Unfortunately, the perception that sales will grow softer can become a self-fulfilling prophecy—as buyers hold off on purchases, inventories will grow and we’ll see downward pressure on prices.

The third factor that influences buying is confidence in the economy. Slow economic growth leads to economic insecurity, even among those who have jobs. So if would-be buyers are worried that the economy is going to get worse, it’s likely they’ll hold off for a while.       

Once consumers regain confidence and banks increase lending to sound individuals, buying activity should start to pick up. After July’s big 27 percent drop in sales, the market has shown signs of healing; August existing-home sales were up almost 8 percent, and recent pending contracts suggest further gains in upcoming months.

But the recovery could be slow, and it will take time before we can say the economy is back to normal. In the meantime, high affordability and low mortgage rates will benefit the buyers who are willing and able to make a purchase.

Lawrence Yun
Chief Economist and Senior Vice President of Research at the National Association of REALTORS®

Lawrence Yun is chief economist and senior vice president of Research at the  National Association of REALTORS®. He directs research activity for the association and regularly provides commentary on real estate market trends for its 1.1 million REALTOR® members. Dr. Yun creates NAR's forecasts and participates in many economic forecasting panels, including Blue Chip and the Harvard University Industrial Economist Council. He appears regularly on financial news outlets and is a frequent speaker at real estate conferences throughout the United States. USA Today recently listed him among the top 10 economic forecasters in the country.