Mark Hanson Warns, Housing Affordability Never Worse… By A Long-Shot

    Authored by Mark Hanson via MHanson.com,

    Bottom Lines: 

    • The income required to buy a median priced builder house has been more diverged from fundamental, end-user, mortgage-needing, shelter-buyer cohort income (purchasing power), which is why builder demand and end-user resales remain anemic.  
    • Meaningful sales growth with this affordability backdrop is impossible.
    • A mean reversion – via surging wages, new era exotic loans, plunging rates, and/or falling house prices, as speculation ebbs – is inevitable. 

    Summary

    My chart highlights how for DECADES the income required to buy a median priced house – using popular programs & rates for each era – remained mostly flat (red line) and WELL BELOW the level of household income (black line).

    How could house prices rise so much for decades but income required to buy (red) them remain flattish?  Because of the accompanying falling rates/easing credit guideline cycle.  In fact, during Bubble 1.0 house prices soared but exotic loans legitimately made them more affordable than ever, as shown.

    But in ’12, as trillions in unorthodox capital, credit & liquidity began to drive massive speculation (just like Bubble 1.0) income required to buy began to surge, with prices, shooting above median HH income (boxed in yellow). Meaningful sales growth with this affordability backdrop is impossible.

    This is the point in this inflationary cycle at which affordability detached from end-user fundamentals.

    Now, in ’17, end-user purchase power & house prices have never been more diverged from the multi-decade trend line and a mean reversion – via surging wages, new era exotic loans, plunging rates, and/or falling house prices, as speculation ebbs – is inevitable.


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