Unlike Shakira’s Hips, Housing Data Can Lie

What difference does a mere $1,000 make on the housing market? Apparently, it makes all the difference in the world.

Housing affordability has been a commonly touched subject for us recently. I have written about it several times because it concerns me. I find it to be a disconcerting topic.

The housing affordability precipice has also caught the attention of other prominent information sources in the real estate world. Including, the National Association of Home Builders (NAHB).

In a study released in August 2014, NAHB examines the effect of increases in the cost to obtain a mortgage and permit new residential construction. They, somewhat alarmingly, conclude that even minor increases in closing costs, permits or other costs associated with a home purchase will have a major effect on the ability to buy a new home for HUNDREDS of THOUSANDS of potential home-buyers.

Is NAHB simply crying wolf and pushing their own agenda or are we that close to going off the housing affordability cliff?

The NAHB study warns; One of the often overlooked impacts of building regulations is their effect on housing affordability. Every time a local or higher level government issues a new construction regulation it raises construction costs.

Higher costs invariably translate into higher home prices and higher prices in turn disqualify more households from being able to afford new homes.

Their “priced out” scenario goes on to claim that every $1,000 increase in the cost of a new median-priced home price forces 206,000 prospective buyers out of the marketplace.

The number of households affected varies across states and metro areas and largely depends on their population, income distribution and new home prices.

Among the states, the number of households who would no longer be eligible to qualify for a mortgage based on a $1,000 increase to a median-priced home ranges from a low of 313 in Wyoming to a high of 18,250 in Texas.

“This study highlights the real effects that building regulations have on housing affordability,” said NAHB Chairman Kevin Kelly, a home builder and developer from Wilmington, Del. “Local, state and federal government officials need to know that higher regulatory costs have real consequences for working American families.

Oftentimes, these government regulations end up pushing the price of housing beyond the means of many teachers, police officers, firefighters and other middle class workers.”

Based on national mortgage underwriting standards and incorporating the latest income distribution data from the American Community Survey and the U.S. Department of Housing and Urban Development, the report contains detailed results for more than 300 metro areas.

The analysis found that every $833 increase in fees paid during the construction process – such as the price of a construction permit or an impact fee – adds an additional $1,000 to the final price of the home.

Measured by local metro areas, the number of households who would be priced out of the market based on a $1,000 increase range from a low of 19 in Napa, CA to a high of 5,742 in the New York-Northern NJ area.

Looking at affordable metro areas, where roughly 50 percent or more of households can afford new homes, the “priced out” effects are larger and can often disqualify thousands of new home buyers, as in the case of metro Houston, TX (4,234); metro Atlanta, GA. (4,135); and Las Vegas, NV. metro area (2,044).

Are these numbers from NAHB legit? Is their conclusion realistic? If so then NAHB has a lot more to worry about than the increasing cost of permits. Housing values are rebounding nicely nationwide and mortgage rates WILL go up as the economy improves and the FED moves forward with an end to their artificial support known as “quantitative easing”.

It depends on your market as to how much homes values are expected to appreciate. Hot real estate markets, where jobs are being added at the quickest pace, are expected to continue their double digit appreciation gains through 2014 and much of 2015.

Markets like San Jose (CA), Austin (TX), San Francisco (CA), Houston (TX) and Atlanta (GA) for example. To put the numbers in perspective; a 10% appreciation on a $250,000 house is $25,000.

When you factor in a small, but given, .25% increase in mortgage rates along with the appreciating home price you see a LOT more than $1,000 increase. How many potential home-buyers will be affected by this scenario:

August 2014 – Home Price/Value = $250,000

30 Year Fixed Mortgage = 4%

Property Tax = 1.25%

Leaving both private mortgage insurance and home-owners insurance out of the equation the principal, interest and property tax payment will be…

~$1,454 / month.

Let’s look at the same home in August 2015 after a 10% appreciation in the price/value AND a very conservative .25% increase in the 30 year fixed mortgage rate

Home Price/Value = $275,000

30 Year Fixed Mortgage = 4.25%

Property Tax = 1.25%

just a short year later the exact same house will require a payment of…

~$1,640 / month.

That equates to ~$186 more per month or $2,232 every year. You will pay 13% more each and every month.

How many potential buyers does that “price out” NAHB? If a mere $1,000 increase in the price of a home eliminates more than 200,000 potential buyers as you claim then simple housing appreciation combined with my normal interest rates will cause major housing market disruption.

According to math a $25,000 increase is 25x more than a $1,000 increase. Sticking with math, dubious or not, that would turn the 200,000 “priced out” buyers into 5,000,000 wayward home-buyers. It’s just math right?

A $1,000 increase in your loan amount adds about $7 per month to your payment.

Will that really knock 200,000 potential home-buyers out of the market?

It will not and the assertion that such a minor increase could have such a profound effect would be scary if it was based in logic.

We get it NAHB! Increased acquisition costs are bad for your business. That is logical and understandable without the trumped up data.

NAHB does produce some very good statistical housing market analysis, but this study is not amongst the pantheon of their data discovery efforts.

That is a very good thing for hard-working Americans from California to Connecticut.

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