Posted on Wednesday, December 8, 2010
Based on the latest S&P Case-Shiller index, Capital Economics has concluded that house prices are now 17 percent undervalued relative to disposable income per capita. Housing has never before looked as undervalued, the firm pointed out in a research note released to DSNews.com.
Looking at the data included in the index compiled by the Federal Housing Finance Agency (FHFA), residential home prices are 14 percent undervalued, which is also a record, according to Capital Economics.
The housing affordability index from the National Association of Realtors (NAR) remains close to its record high. Capital Economics explained that NAR’s affordability assessment indicates that a median income household with a 20 percent down payment can now more easily afford the monthly mortgage payments on a median-priced home than at any time in the last 30 years.
Rock-bottom interest rates have also helped to bring owning a home within the means of more Americans. Mortgage rates have begun to head upward from half-
century lows in recent weeks, but Capital Economics says the increase has done little to reduce overall affordability.
The firm’s analysts explained that the recent rebound in 10-year Treasury yields has pushed 30-year fixed mortgage rates up from the record low of 4.25 percent seen in October to 4.50 percent. They say the bigger picture, though, is that mortgage borrowing has remained incredibly cheap. According to Capital Economics, anything below 5 percent is a bargain compared with the average mortgage rate over the last 20 years of just above 7 percent.
Such a high level of affordability, however, has done little to drive consumer demand. Capital Economics says the problem is that high unemployment, tight credit conditions, and widespread negative equity are preventing households from taking advantage of cheap financing and favorable valuations.
After rising in each of the previous two months, both existing and new home sales fell back in October, by 2.2 percent and 8.1 percent month-over-month, respectively, according to recent industry stats. Capital Economics notes that total home sales in October were just 14 percent above July’s trough and 17 percent below the 5.7 million annual pace that historical sales rates suggest is normal.
The company’s analysts believe that part of the decline in home sales probably reflects the freezing of foreclosure activity by several major servicers towards the start of October.
Some deals on properties repossessed by lenders likely fell through as banks pulled their inventory from the market. But Capital Economics points out that this dynamic should not have affected new home sales, which implies that the industry’s foreclosure affidavit problems may have hit the confidence of all buyers.
“The housing market recovery appears to have stalled before it even really began,” according to the analysts at Capital Economics.
DS News Carrie Bay