The Key to Real Estate Recovery: Affordability

key to real estate market recovery is affordabilityI’m no economist, although as a real estate investor and loan modification consultant I do study trends like unemployment and consumer confidence.  These trends have less to do with what is actually going on in the real estate market and more to do with public perception.  After all, unemployment may be up and consumer confidence down but people still need a place to live. 

Forget about price per square foot.  Forget about tax incentives.  Forget about absorption rates and inventory levels.  Forget about median prices.  And, forget about unemployment rates and consumer confidence.  The key to real estate recovery is affordability.

Maricopa Seeing Signs of New Beginning, an article in last Sunday’s edition of the Arizona Republic, told the story of a community 30 miles south of Phoenix hit hard by the real estate market downturn.  Maricopa is on the road to recovery because homes there are affordable again.

The median price for a home in this community is $100,000.  A first-time homebuyer can get an FHA/VA/USDA home loan at 6.5% and with a monthly payment of $777.  A family with a combined household income of $40,000 can easily afford this payment.  Likewise, an investor looking for cash flow, a tax deduction and hedge against inflation can do well here.  If the investor pays all cash and nets $750 a month in rent their annual cash on cash return is 9%.

The California Association of Realtors publishes a Housing Affordability Index on their website.  According to their site “the C.A.R.’s First-time Buyer Housing Affordability Index (FTB-HAI) measures the percentage of households that can afford to purchase an entry-level home in California.”

In the first quarter of 2008, 46% of Californians could afford to purchase a home…the first quarter of this year, 69%.  There are a number of areas in California that are experiencing the same type of recovery as Maricopa, Arizona. 

While this index, like most indices, don’t explain the whole story it is clear that as homes become more affordable again people will buy.

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