Low Housing Affordability Leads To Decline In Sales

(The slowing U.S. real estate market can be blamed for a variety of reasons.)

The most popularized theory is that sellers are too reluctant too lower prices and admit it is becoming a buyer's market, while buyers are waiting for prices to drop significantly (not just a couple thousand dollars).

But why did home prices escalate so high in the first place? Although there are many sound reasons as to why sales are dropping at record paces, the simple fact remains that homes are just not affordable enough.

The October 3, 2006 article, "Homeowners Spend More Of Income on Housing Costs," written by the associated press and printed in The Wall Street Journal, explains how the low affordability factor is causing a larger percentage of household income to be used for home buying.

According to the U.S. Census Bureau, homeowners in every state but Alaska spent a higher percentage of their incomes on housing costs last year than at the start of the decade.

"Nationwide, homeowners spent nearly 21% of their incomes on housing costs last year, up from just under 19% in 1999. Housing analysts blamed surging home prices, higher interest rates and lower incomes for hurting affordability."

You can always gauge the strength of a real estate market by its housing affordability. The market slowdown was widely predicted by the end of 2005 as housing prices soared way ahead of the pace of inflation.

If people do not make more in their jobs within a year or two, how will they be able to afford an extra $50,000 for a home within two years?

"'It is now much more difficult for first-time homebuyers to get into the market, and for existing homeowners to trade up,' said Mark Zandi, chief economist at Moody's Economy.com. 'This decline in affordability is the catalyst for the current sharp decline in housing activity.'"

While the housing market has been experiencing a slight decline in home prices, the median asking price is still unaffordable for many Americans.

"Nationwide, median home values jumped 32% from 2000 to 2005, to $167,500. Household incomes have not kept up, dropping 2.8% during the same period. 'Until incomes catch up, the housing market is going to remain flat,'" Zandi said.

At the same time, a contradicting statistic released by the Census Bureau claims that America is at a near-record pace of home-ownership at 68.7 percent. But many industry experts expect this number to decline as buying slows and low income families are not be able to keep their homes due to rising interest rates and fees.

"For example, the government says housing costs are excessive if they top 30% of household income. Nationally, 34.5% of homeowners with a mortgage had housing costs that topped that benchmark in 2005, an increase from 26.7% in 1999."

Home-ownership has always been expensive but there is a growing uneven balance in the industry. Prospective buyers are becoming aware of the price injustice and are waiting for better pricing. California recently experienced a year-over-year decline of over 20 percent in August sales.

So if you are a prospective buyer and cannot quite afford that dream home; hang in there, it should get better before it gets worse.

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