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Residential Department: DataDecoded: November 2016



Uncertainty clouds rising home prices

U.S. Housing AffordabilityIs home-price appreciation a sign that the U.S. housing market is continuing to recover from the most volatile boom-and-bust cycle in history, or is it a harbinger of pending doom? This is more than just an interesting debate topic in today’s market, where home-price appreciation is a result of unusual market dynamics and one of the factors driving market performance.

First, let’s take a quick look back. Home prices fell by more than 29 percent from peak to trough in the housing-market meltdown, based on an average of the four major home-price indices, which are published by the Federal Housing Finance Agency, the National Association of Realtors, S&P CoreLogic Case-Shiller and Zillow. Prices have climbed back slightly over 30 percent from the low point and were up 5.4 percent year-over-year as of this past second quarter.

Essentially, this gets us back to more or less where prices were in 2006. Pricing recovery has been wildly inconsistent, however, because less than half of the states across the country have recovered to their prior peak levels, according to a recent report by Black Knight Financial Services.

This uneven recovery has left millions of homeowners underwater on their mortgages — owing more on the loan than their properties are worth. According to the Q2 Home Equity Report issued by CoreLogic, 7.1 percent of all homes with a mortgage, some 3.6 million homes, are underwater. Another 17 percent, or 8.6 million homes, have positive equity, but are considered “under-equitied,” with less than 20 percent equity.

This situation effectively keeps 12.2 million homes off the market, contributing greatly to the problem of low inventory that has hampered the housing recovery, and, ironically, contributing to the continuing rise in home prices. The supply of existing homes for sale across the country continues to languish in the four- to 4 ½-month range, well below the six- to 6 ½-month supply that most industry analysts view as equilibrium.

Rising home prices will move more and more properties from negative or near-negative equity into positive territory and gradually allow homeowners to put their homes up for sale — helping to resolve the inventory shortage. The $1 trillion question, however, is whether anyone will be able to afford those properties once they come to market.

Home prices have increased much more rapidly than wages in the last decade, and although affordability on a national basis remains good from a historical perspective, it’s trending in the wrong direction — with the median housing affordability index down 4.5 percent year over year as of second-quarter 2016. Meanwhile, median monthly mortgage payments have risen by 6.5 percent over the same period, despite interest rates that have actually fallen over the past 12 months.

The combination of wage stagnation and home-price appreciation has resulted in borrowers shelling out a higher percentage of their income for principal and interest (P&I) payments. According to Ten-X Research, The percentage of income spent on P&I payments rose for the fourth straight month this past June, rising to 16.3 percent. These national numbers mask more troubling affordability concerns in markets that have seen more explosive home-price increases in the past few years, such as the Pacific Northwest, coastal California and parts of Texas — all areas where inventory levels are far below the already-low national numbers.

Ultimately, higher home prices should lead to more inventory, which, in turn, should lead to a state of supply equilibrium and slowing appreciation. Will this happen before prices appreciate to a point where affordability becomes challenging across the country? And what will happen to affordability levels if and when interest rates finally begin to creep back up? These are unanswered questions for today, but they are two trends to watch carefully as we move into 2017.


Rick Sharga is executive vice president of Ten-X. He is one of the country’s most frequently quoted sources on real estate, mortgage and foreclosure trends. Sharga has appeared on top television shows and briefed government organizations and corporations on foreclosure trends. He also conducts foreclosure training for leading real estate organizations. Before Ten-X, Sharga was an executive vice president and primary spokesman for Carrington Mortgage Holdings. Reach Sharga at

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