In a lot of ways, real estate today should be a buyer’s paradise: Property values remain at or below their historic affordability levels in most markets, lenders have $2 trillion in excess cash available to lend, and foreclosures have fallen to levels last seen in 2006.

So why have home sales stalled in recent months?

A real estate market that should be flying high is instead a real estate market that’s faltering. This isn’t the way the script should read. If things are seemingly so good, then how come we’re not seeing more home sales?

The explanation is complex, but the short version is this: Incomes are down in many markets. Prices and mortgage rates — which should be hugely attractive to large numbers of buyers — are simply off-limits because paychecks are smaller. Worse, we’re not selling a lot of homes to first-time buyers, and that could mean housing woes for years to come.

We usually think of the income-vs.-cost problem in terms of absolute affordability — think the 30 percent that a Depression-era grandparent might advise as the maximum percentage to be spent on housing — but that’s not quite the right measure. If you look at affordability through this absolute lens, you often get the wrong result because markets vary enormously.

The better approach is using a relative affordability measure that compares a market or micromarket to itself rather than other markets. For instance, the percentage income sufficient to buy a home in Omaha is unlikely to work in San Francisco. This is not a problem if you live in Omaha, but it’s a very big issue if you move to California and attempt to spend the same amount on housing as in Omaha — even given that the median household income in San Francisco is 45 percent higher than in Omaha.

Our analysis of relative affordability from January 2000 to May 2014 in more than 1,000 counties nationwide found that in Douglas County, Nebraska (where Omaha is located), the historical norm for percent of median household income needed to buy a median-priced home is 17 percent, while in San Francisco County it’s 75 percent. People want to live in San Francisco so bad that they’re willing to fork over a much bigger chunk of income to do so. The national average over the last 14 years is 19 percent of median household income needed to buy a median-priced home.

Another way to look at this is to use Massachusetts Institute of Technology’s living wage calculator. With this device we can see that it takes $18.64 per hour for a household with two adults and two children to make it in Douglas County, Nebraska. In San Francisco County, the same couple needs $25.44 per hour.

For our purposes, affordability issues raise two issues: First, we want communities to be affordable because without affordability you soon run out of teachers, first responders and a thousand other professions on which we all rely. Second, when affordability sags, you have fewer first-time homebuyers — and that means trouble.

First-time homebuyers and affordability

The data plainly show that home sales at the lower end of the price spectrum — the place where you are most likely to find first-time purchasers — have fallen through the floor. It’s the clearest demonstration of a first-time-buyer affordability gap to be found.

In terms of real estate, the big affordability issue is that if first-time buyers are not purchasing homes, then move-up sellers can’t sell. If they can’t sell, they can’t move, and the next layer of owners with still-higher-priced homes cannot market their properties. There is a domino effect felt through the housing market when sales to first-time buyers slow.

How did things get so strange, and what does it mean to buyers, sellers and investors? Let’s look at some specifics.

Home prices

A better option than looking at national trends is to examine smaller pieces of the puzzle. For instance, the National Association of Realtors has a quarterly review of metro prices. Its most recent review of metro home prices looked at values in 170 metropolitan statistical areas and found that in the first quarter prices rose in 125 metro zones — and fell in 45.

But home price appreciation is slow. We found that home price appreciation slowed compared to a year ago in 65 percent of the metro areas we tracked in our July sales report (119 out of 183 total metro areas).

Yes, home values have risen during the past year in most markets, but the more important point is that real estate values have yet to reach the previous peaks in most areas. The Federal Housing Finance Agency says that home prices rose 0.4 in May but remained 6.5 percent below the high-water mark seen just before the brunt of the mortgage meltdown hit. The affordability result: Home values remain depressed when compared with past highs.

Mortgage rates

Lender vaults are stuffed with cash. According to one estimate, banks are now sitting on $2 trillion in excess funds, and the predictable result is that mortgage rates have stalled. Freddie Mac says that at the end of July, the typical 30-year fixed-rate mortgage was priced at 4.12 percent. Back in April 2007, mortgage rates for the same loan stood at 6.18 percent.

The rate differential is huge. Borrow $200,000 at 4.12 percent, and the monthly cost for principal and interest is $958.72. At 6.18 percent, the monthly expense is $1,222.34. The affordability result: In today’s world, people worry about rates in the 4 percent range because they’re “higher” than the record-low rates seen in 2012, when interest levels reached a 65-year low.

However, the more important point is this: According to Standard & Poor’s, the average mortgage rate during the past 40 years has been 8.6 percent. Today’s rates reflect a discount of better than 50 percent.


It follows that if home prices are down from 2007 and mortgage rates are half off, then affordability should be soaring, but that isn’t the case. The problem is that incomes are down in this market filled with great real estate deals and cheap financing. If you had a household income of $51,017 in 2012 — the national average — you earned 9 percent less than the typical household in 1999. In terms of buying power, it takes $1,430 today to purchase goods and services worth $1,000 in 1999.

Our analysis of median household income data at the county level shows that median household incomes decreased between 2008 and 2012 in real terms in 43 percent of the nation’s more than 3,100 counties. Among all counties, even those with increasing income, the average change in income between 2008 and 2012 was just 2 percent.

Meanwhile, the costs of goods and services as measured by the Consumer Price Index increased 9 percent during that time period, even as median home prices dropped 22 percent, according to our data. But since 2012, home prices have bounced back and risen 22 percent as of July 2012, while the CPI has risen 3 percent during the same time period. Median income data is available only at this time through 2012, but it’s unlikely that incomes have jumped 10 percent over the past two years — after rising just 2 percent in the four years between 2008 and 2012 — enough to catch up with the overall 12 percent rise in the CPI between 2008 and July 2014.

The bottom line: Consumers now need to spend more of their income on other goods and services and have less left over for housing than they did prior to the Great Recession.

And the place where you most clearly see the impact of reduced affordability is with first-time homebuyers. NAR says that first-time buyers in June represented just 28 percent of all existing-home purchasers. That’s down from past levels of 40 percent or so.

The core barrier to greater real estate sales has nothing to do with either home prices or mortgage rates. They’re demonstrably affordable. Instead, the problem has to do with jobs and income. Simply put, we don’t have enough jobs; the jobs we do have don’t pay enough; and the result is that homeownership levels are at the lowest point in 19 years, according to the U.S. Census Bureau.

Daren Blomquist is the vice president of RealtyTrac.

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