Who Wins? Who Loses?

There has been a lot of news lately about the increases in housing prices in the last few years. In my area, the rate at which values are rising has slowed a bit, but they are still increasing at a good clip. So who wins and who loses in this game?

There are clearly two groups here: group one are homeowners and group two are non-homeowners. Homeowners of existing homes sell them at a rate of about 7 million per year. New homes are being built at a current rate of about 1.5 million units per year. We can conclude that there are more than 1.5 million new homeowners every year because, albeit somewhat grimly, some number of the 7 million re-sales occurred because someone died or moved into a retirement facility. Maybe that's a half-million homes, so theoretically, our society creates about 2 million new homeowners per year.

Let's look at some other statistics. The national increase in housing value for the 1st Quarter of 2005 was up 9.7 percent from the comparable period in 2004. However, there were a number of areas in Florida and California where the increases were up over 35 percent. In my home county, the average price was the second highest in the nation, $656,900. Zounds! For statistics about your state, click here.

Of course, our national policy has been in increase the number of homeowners so we worry a lot about how we can move people from group two to group one. The rate at which that happens is determined largely by housing affordability. Can people afford a home in their area? It's pretty obvious that incomes did not increase by 9.7%, much less 35%. And the number of new job creations doesn't support people buying those expensive homes. So how do those people afford them?

Well, the first reason is that interest rates have been low with the 30-year fixed rates having been below 6 percent for a couple of years. Of course, there are a lot of other programs with even lower rates. Another important issue has to be factored in as well, that of industry qualifying standards. The plain fact of the matter is that the mortgage industry will approve darn near anyone these days. Compare that with the last 50 years when the underwriting standards were very strict. In those days lots of people got turned down.

I have done a number of 100 percent financing for people, even some for folks with less than sterling credit and high ratios. These were "make sense" deals where people did have the ability to handle the financing and develop some equity. But lots of worse deals are being approved too. I saw a flyer yesterday offering 100 percent financing for people with 500 FICO scores.

So where are we headed? The answer is that at some point in time, there is an end to this merry-go-round. At some point, the rate of job creation, income increases, interest rates, qualifying criteria, and housing values reach a point where the equation does not work as well as it has in the last few years.

At that point you can see that some number of non-homeowners - some fraction of the 2 million - will be unable to buy a home. That will reduce demand and it will come more in balance with the supply of homes. At that point, things will slow down, but I do not see factors that would cause a correction.

The frustrated potential homebuyers are the only ones who are losers. The economist who appears on TV talking about the affordability crisis is almost certainly one of the seventy million or so who own their own homes. They are the winners. When he drives home after the program, he will probably not worry at all about those who are negatively affected. He will think about and perhaps gloat over how much his home has appreciated in value. That is just human nature.

For those in Group two, the potential homeowners, there are properties out there and those who are most well-prepared and who work the hardest will buy them. I hope it's you and you can be a winner too!