Its All About Affordability

Good Afternoon Everyone!

I just wanted to discuss a couple of things today real quick. I found a great article in the USA Today around the housing crisis.

This article does a great job breaking down the housing bubble. Basically 1 in 9 homes in the USA are now sitting vacant.

Here is the money quote from the piece:

"Sales of existing homes rose 5.1% to 4.72 million from January to February — the largest sales jump since July 2003, the National Association of Realtors reports.

The surprising increase was driven by buyers taking advantage of big discounts on foreclosed homes. The median sale price was $165,400, down 15.5% from a year earlier and down 28% from their peak in July 2006."

My Take:

Its all about affordability folks. I have been preaching this for over a year now. The bounce in home sales that was seen in February was based on one simple formula: AFFORDABLE HOUSING. The median sales price was $165,000!

Homes priced at this level will find buyers because its well within the affordability of the average family when you look at the average household income in the US:

A good rule of thumb is that you should buy a house that's about 3 times what you earn. 3-1 debt to income on a house is the mean that we have seen in this country for decades until the housing insanity that hit earlier this decade.

As you can see above, the average household income is around 50k. So Americans in general should pay around $150k for a house. The median price for the home sales in February was 165k. HELLLOOO!!!!! Anyone see a trend here?

When Americans can find something within their affordability range they buy it. Just as importantly, the banks and their tighter lending standards will do loans at 3 times income because they are confident they will actually be paid back.

This is not rocket science people! This is why I get so infuriated when I watch Wall St. and Washington continue to try and prop up home prices by doing more bad loans at unsustainable artificially low lending rates.

America sent a message in February: Give us affordable housing and we will buy it!!!!

The problem we have here is most of the McMansions in America in the hot markets are priced at 400-500k. Most of these houses are not going to move until they are sliced in half or more depending on the market. Look at the math above folks. It says it all. There is plenty of demand for housing homes are priced at proper debt to income ratio's.

Home prices only got this expensive with exotic lending products that no longer exist. These prices must be adjusted because housing is never coming back to where it was! The banks keep praying that it does but its not gonna happen folks.

This means trillions in losses for our financial system(Ooops! I mean the American taxpayer) as millions continue to get foreclosed on and sold huge losses, and new home sales are forced to be given away at a 50% haircut.

March Tax Receipts Plummet 28%

I'll end with this little tidbit. Take a look at the Treasury tax data for March. Revenues are down 28% as a result of this economic collapse.

Anyone care to explain to me how we can afford to spend $11 trillion in bailouts at a time when are our tax receipts are off by about a third? Can you say nightmare?

Keep spending Washington DC. Bankruptcy is right around the corner.