The Reason Behind the Home Sales Uptick: Affordability

Some analysts were surprised by the housing numbers out this week which showed that sales actually started to improve in a few cities across the country.

In fact, the one city seeing booming sales is Cleveland.

Cleveland?

Isn’t Ohio in deep financial pain?

Yes and no.

Foreclosures are crushing housing prices in Ohio. So as houses become cheap- suddenly a bunch of people who could not have afforded a house in the past, can now get one. Even with tighter mortgage requirements, they’re still able to buy.

And if prices get really cheap- they’ll WANT to buy.

That is why the housing data is showing a slight improvement in sales. Prices are getting so low in some areas, that some buyers are thinking they’d be crazy to rent.

From CNNMoney:

Still, Larson of Weiss Research said he believes that while year-over-year prices will continue to decline, sales of foreclosed homes will help moderate those losses by taking rock-bottom priced homes off of the market.

“Prices have fallen so much that you’re starting to see sales improvement,” he said. “People are snapping up a lot of distressed properties.”

Foreclosures Dominate the Market

In some cities, foreclosures make up 30% of total home sales. That’s not really a “healthy” market. But it does indicate that the correction is well underway.

That correction entails housing prices that are much, much lower than the last several years. Affordability all but disappeared during the housing boom. And now, without the easy to get loans that required no money down, affordability will be the key to getting this housing market moving again.

What is “affordable”?

I was watching House Hunters the other day on HGTV. They had an episode on about a young first time home buyer who was a school teacher in the Detroit suburbs. She was looking to buy a foreclosed bungalow in the Detroit suburbs.

The price?

Around $70,000.

And these weren’t dumps! They were 1920s-1940s brick bungalows with nice yards. Sure, they were on the smaller side (1100 to 1300 square feet)- but for $70,000? And that was the ASKING price. She likely bought it for much cheaper- probably around $50,000.

Most people in this country couldn’t even imagine a garage space selling for $50,000, let alone a house.

Imagine all the other things that school teacher can now do with her money (instead of obsessing over her house)?

1. She can go on great vacations anywhere in the world.
2. She can max out her 401k.
3. She can save money for a rainy day fund.
4. She can buy expensive clothes.
5. She can buy that iPhone.
6. She can donate to charity.
7. She can buy stocks. Lots of stocks.

And on, and on, and on.

Being house poor is NOT financial freedom. A large mortgage doesn’t make you wealthy. A house is simply shelter- and if you make some money off it along the way then that’s great.

This school teacher has endless ways to create wealth in her life- simply because all of her income isn’t going towards a mortgage payment.

The rest of the country hasn’t yet caught up to Cleveland and Detroit in affordability. But it’s getting there. We’re seeing big price declines in cities where incomes haven’t kept up with housing prices.

Las Vegas is down 28.6% from last year. Miami has fallen 28.3% and Phoenix has slid 27.9%.

This housing bust will bottom out when affordability returns. And not before.