More Expensive, Yet More Affordable
by Charlie Elliott, MAI, SRA

A sure sign that we’re in a new year is a lot of study results are coming our way. Primarily, these are conclusions of studies that had been conducted the previous year.

Three of them appear to be particularly interesting:

(1) A National Association of Home Builders (NAHB) study revealed that the costs of building homes increased dramatically last year.

(2) A National Association of Realtors (NAR) study concluded that the U.S. median home price rose a whopping 13.6% in 2005.

(3) A report published by Moody’s Economy.com indicated that housing in the United States has actually become, as a whole, more affordable.

Now the conclusions of Study No. 1 on the above list certainly blend in with the conclusions of Study No. 2. However, the results of Study No. 3 seem rather contradictory in light of the reports generated from the first two studies. How can that be? In order to try to find an answer to this question, we need to take a closer look at the above three reports.

The NAHB report concluded that prices of building materials increased by about 10% last year. Hurricane Katrina and her evil sister Rita caused a spike in the costs of concrete, PVC pipe and other products, which led to building materials overall going up in double figures. Higher interest rates and energy costs also contributed to the increasing home building costs.

The NAR study showed that home prices are going up accordingly. It must be pointed out that the 13.6% figure is the median, not the average. What this means is half the homes went up by more than 13.6% and the other half rose in price by less than 13.6%, not counting the few that actually rose by exactly 13.6%. The average increase in U.S. home values for 2005, which should be available in yet another study after press time, would probably be larger than the median, due to the fact that stupendous home price increases in areas of California, Nevada, Florida and other states would add to its volume.

While expenses (in this case, building costs) are a key factor is pricing, it’s fair to say the law of supply and demand takes center stage in real estate pricing. Demand has really skyrocketed in the greater D.C. area, as well as the states previously mentioned.

It’s also important to note that this same study showed that price increases actually cooled down a bit during the fourth quarter of ‘05 and that David Lereah, the NAR’s chief economist, predicts this trend will continue.

Now let’s move on to the Moody’s study. It concluded that housing is more affordable in this country. The report on Moody’s Web site, Economy.com, determined that the percentage of a typical American family’s income that was needed for mortgage payments was 30% in 1982. By 2005 that figure had dropped to 22%.

So the fact that houses as well as building materials have seen significant increases has not led to an adverse effect on housing affordability. The study gives three explanations of that in its conclusion: low interest rates, higher incomes and more housing.

As previously stated at the beginning of this column, those studies were about last year. As businessmen and businesswomen, our concern is now about this year and beyond. So let’s take a look at those reasons and see if we can continue to count on them.

The lowering of the interest rates earlier in the millennium was a godsend to our businesses and the economy as a whole. Housing, construction, real estate and the financing of this activity truly drove the economy during troubled times in the wake of 9/11. Now interest rates are creeping back up, but some economists have predicted these increases will end after this month. If interest rates hold from here on out, they will remain historically low.

Rising incomes are not quite such a sure thing. The U.S. economy has lost a lot of manufacturing jobs in recent years. Meanwhile, most of the new jobs created are coming from the service sector, and these jobs typically do not tend pay as much. Many employers are increasing wages and salaries to keep up with inflation, but the changing of guard from the manufacturing sector to the service sector is a bit unsettling.

The new construction going on is encouraging. We have seen a lot of construction draw inspections in our business and yet another study, this one by the U.S. Department of Commerce, reported that this past January saw home building activity churning along at a record pace. The Commerce Department report said that the construction of new homes and apartments was 14.5% higher in January than it had been in December. Construction was at a seasonally adjusted annual rate of 2.276 million units, which makes it the highest construction rate since March 1973. Single-family home construction rose 12.8% to 1.819 million units, the highest ever. And multi-family units went up 21.9% to 457,000 units.

And there’s more: The issuance of building permits in January was an impressive 2.217 units. Since building permits are not affected by the weather I look at this as a sign that home building will be strong throughout 2006.

It would be remiss to fail to mention that the Moody’s study did point out that housing affordability is definitely not guaranteed throughout the country. In parts of California and New York, as well as the Boston and Chicago areas the percentage of family income required to pay home mortgages currently exceeds 40%. It is in areas like this, where I believe construction is at its fastest pace. This should improve the affordability issues in these places.

In conclusion, we all have a lot at stake when it comes to the housing in this country. Lenders, builders, Realtors, appraisers, suppliers and homeowners, not to mention those catching a ride on the waves in other businesses are all stakeholders.

While there is yet any substantial proof of a housing recession, I plan to approach the housing market in my business with cautious optimism and suggest that you do, also.