National Housing Market Outlook

Affordability is a “C-“: Are We Nuts?

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John Burns

February 12, 2010
Before I get into our Affordability calculations, let me explain the methodology behind all of the grades below.
  1. We collect a complete history on 70+ variables and forecast the important ones by forecasting each MSA and rolling it up. Our U.S. Housing Forecast includes a complete history on every variable below, and forecasts on the important ones, and is only $145 for one month and $450 for an annual subscription.

  2. In this monthly email, we publish the current stats along with the historical minimums, maximums and averages as a service to the industry.

  3. Each indicator is graded based on a bell curve where an “A” is its historical best, a “C” is its historical average, and a “F” is its historical worst. The grades are designed to provide a simple tool for decision makers to scan the data.

  4. Each of the 8 categories has a grade that is nothing more than the average of the grades under it.
Our Affordability grade is a “C-“, which on the surface looks absolutely ridiculous. With an “A-” for our JBREC Affordability Index (we recently renamed our Housing Cycle Barometer) and an “A+” for mortgage rates, one might think that Affordability analysis should stop there.
However, only 50% of new home buyers traditionally are coming out of an apartment. The other half need a down payment. Here is what is weighing down our overall grade:
  • Equity: Average equity in a home is $82,471, which is a “D-” (our grades use current dollars to account for inflation over time)

  • LTV: Loan-to-value of 62.5% is a “F” because of the historical norm of 34.5% (this statistic includes the almost 1/3 of all homeowners who do not have a mortgage), and

  • Income Growth: Incomes have declined 3.9% in the last year, which is the worst year on record.
What does this mean? Affordability has rarely been better for an entry-level buyer, and affordability has rarely been worse for the many potential move up / move down buyers who bought or refinanced their home in the last decade. With this knowledge, and hopefully some more detailed analysis at the local level, you can make great decisions for your business.
Economic Growth………………………………………………………………….D+
Economic growth has begun to improve compared to last month, and we are seeing signs that job losses are nearly over. The preliminary fourth quarter GDP growth rate skyrocketed to 5.7%, compared to a final value of 2.2% in the third quarter. Much of the growth was the result of recent government stimulus and an increase in inventories. The pace of job losses also eased this month, although in the last 12 months the U.S. has lost 3.94 million jobs, which is equal to a decline of 3% of the total payroll workforce. Unemployment fell unexpectedly compared to last month to 9.7%, while the broader measure of unemployment, the U-6, also fell to 16.5%. Mass layoff events – defined as a cut of 50 or more jobs from a single employer – also eased to 1,726 this month, and has fallen 30% compared to one year ago. Job seekers are finding it increasingly difficult to find employment, as the amount of time required to find work is currently double the historical average. The CPI (all items) increased again to 2.7% from one year ago, while the Core CPI (minus food and energy) also rose to 1.8%.
Leading Indicators…………………………………………………………………C
Leading indicators rose this month for the most part, yet the pace of improvement has begun to ease. The December Leading Economic Index 6-month growth rate increased to 10.8% after declining for the past two months, and remains very high compared to history. The ECRI Leading Index – an indicator of future U.S. growth – fell in January, yet remains near its highest level in 77 weeks. The index at the end of January increased 21.5% year-over-year, its fifth largest growth rate on record since ECRI began tracking that statistic in 1968. Stocks ended their upward streak in January, yet all four major indices we track have posted positive year-over-year results ranging from +15% to +36%. The S&P Homebuilding Index also improved in December. The spread between corporate bonds and the 10-year treasury fell in December, declining to 150 bps after peaking at nearly 270 bps in March. Since the 10-year treasury is seen as a risk-free investment, the spread between corporate bonds and the 10-year treasury displays the perceived risk of investing in corporate bonds, which has declined recently as Wall Street has become less worried about businesses failing. According to the 4th quarter CEO Confidence Index, CEOs are now much more confident about the economy. Confidence as of the fourth quarter is now approaching early-2007 levels. The survey of CEOs revealed that 84% expect their profits to either remain flat or increase in the next 12 months and 87% of CEOs plan to keep the same number of employees or increase the number of employees over the next year.
This month, affordability worsened as a result of a slight increase in home prices and a slight rise in mortgage rates. However, our housing-cost-to-income ratio remains at just 27.2%, and housing affordability remains excellent compared to history. Affordability is so good that owning the median-price home is now nearly just as affordable as renting the average apartment – a difference of just $54 per month. Household income has fallen 3.6% year-over-year to $52,817 as a result of large job losses and government furloughs. Despite the recent steady drop in incomes, the median-home-price-to-income ratio remains just slightly above the historical average at 3.4. The 30-year fixed mortgage rate increased slightly to 4.98% by January month-end, while adjustable mortgage rates fell to 4.29%. The Fed’s overnight lending target rate remains at a range of 0.00% to 0.25%, which is the lowest level on record. The share of ARM applications increased to 4.5% by the end of January which is a significantly smaller share than the peak level of 35% of total applications in early 2005.
Consumer Behavior………………………………………………………………..D
Consumer behavior improved once again this month. Consumer confidence increased in January to 55.9 yet remains well below the historical average of 97. Consumer sentiment improved this month as well to 74.4 – also low compared to the historical average. The Consumer Comfort Index rose to a monthly average of -44.5 in December. The personal savings rate of 4.8% increased compared to last month, yet down from the recent peak of 6.9% in May. The U.S. net worth has increased quickly over the past two quarters due to improvement in the stock market, but has fallen $3.4 trillion within the past year. The Misery Index also increased this month due to an increase in inflation.
Existing Home Market……………………………………………………………..D+
The existing home market weakened this month. The seasonally adjusted annual resale activity plummeted to less than 5.5 million homes in December, according to the National Association of Realtors (NAR). This is a decline of 15% year-over-year, and a drop of 16.7% since last month. Despite the seasonally adjusted decline, on a rolling 12-month basis sales have improved for six consecutive months, increasing 1.0% this month and 4.9% year-over-year. The federal tax credit was set to expire on November 30th until it was ultimately extended to Spring 2010. This led to a surge of buyers closing by November, and in December the rush to close was lost. The national median price of an existing single-family home spiked to $177,500 in December, up from $169,300 in November. The recent increase led to a 1.4% year-over-year gain, and marks the first positive growth rate since July 2006. The Case-Shiller national index, which tracks paired sales, improved in the third quarter, and the monthly 10 and 20 market composite indices both declined compared to last month for the first time since April 2009. Although the indices remain down year-over-year, the rate of decline continued to ease. The number of unsold homes rose to 7.2 months of supply in December, rising above the historical average. Pending home sales volume inched upward in December, and have increased 11% year-over-year. As of the third quarter, 23% of all homes with a mortgage throughout the U.S. were worth less than the balance of the mortgage.
New Home Market……………………………………………………………………D+
Overall, the new home market worsened compared to last month. Builder confidence fell again one point in January to 15. Seasonally adjusted new home sales volume also fell in December to 342,000 transactions, declining 9% year-over-year. The rolling 12-month total through December also fell this month to 373,000 transactions, tying the all time record low, previously set in July 1982. The median single-family new home price rose to $221,300 in December, but has fallen 3.6% year-over-year. The inventory of unsold homes increased for the second consecutive month to 8.1 months of supply and the volume of new homes for sale remains flat at 234,000 homes, which is the lowest volume since April 1971.
Repairs and Remodeling…………………………………………………………..D-
Conditions for residential repairs and remodeling were weaker than last month. Homeowner improvement activity fell in the third quarter, representing a drop of 9.4% year-over-year. The Remodeling Market Index increased in the third quarter to 39.8 and has rebounded after bottoming out in the fourth quarter of 2008. Despite recent increases, the index remains well below the historical average of 50. Residential construction has fallen 19% year-over-year as of November, yet the pace of decline has eased.
Housing Supply………………………………………………………………………..F
In general, housing supply has declined compared to last month. Total completions fell to 768,000 this month, representing a 25% year-over-year decline. Seasonally adjusted new home starts also fell in December, due to a 7% drop in single-family starts. Multifamily starts increased 12% since last month, yet remain down 38% from one year ago. Seasonally adjusted total permits increased to 653,000 this month, representing an increase of 11% compared to November, but a decline of 16% year-over-year and have fallen nearly 74% since its most recent peak in September 2005. Although vacancy rates in the U.S. have improved in recent quarters, the majority of the U.S. remains oversupplied compared to history. Just five states in the U.S. are currently undersupplied – New Mexico, Oklahoma, Wyoming, South Dakota and North Dakota.
Data Current Through February 11, 2010
Overall Grade
Economic Growth
These are the best indicators of how the economy is currently performing.
Real GDP (annual rate) 5.7% C+
Employment Growth (1-year Change)
- Non-ag Payroll, NSA -3,943,000 D
Employment Growth Rate
- Non-ag Payroll, NSA -3.0% D
Unemployment Rate 9.7% F
Average Length of Unemployment (Weeks) 30.2
Median Length of Unemployment (Weeks) 19.9
% of Labor Force Unemployed 27 weeks and over 4.1%
U.S. Initial Jobless Claims 480,000
Mass Layoff Events, SA (YOY % Change) -29.9% B+
Productivity 6.2% B-
Retail Sales 5.4% C
Capacity Utilization 72.0% F
Core CPI 1.8% B+
Full CPI 2.7% C
Personal Income Growth, nominal -0.3% F
Federal Deficit (last 12 mos., $mil curr.) -$1,472,921 F
U.S. Immigration as a % of Total Population 0.4%
Total Population Growth 1.0%
Total Households 111,711,000
- Growth Rate 0.9% D
Owned Households 75,038,000
- Growth Rate 0.4% D
Rented Households 36,673,000
- Growth Rate 2.0% C+
Leading Indicators
These have all proven to be predictable early indicators of the direction of economic growth.
Leading Econ. Index (Ann. Growth Rate Last 6 Mos.) 10.8% B
ECRI Leading Index 21.5% A-
Manpower Net Employment Outlook 6% D
U.S. Vistage CEO Confidence Index 88%
CEO Economic Outlook Survey 72%
U.S. Average Hours Worked per Week 33.3
Temporary Employed Workers -23.9% F
Corporate Profit Growth (pre-tax) -6.7% D
Corporate Bond Spread (Corp Bond vs. 10-Yr Tres.) 150.0%
Capital Goods New Orders -10.2% D
Money Supply - M2 0.7% C-
Interest Rate Spread
10-year Treasury 3.66%
2-year Treasury 0.86%
Interest Rate Spread 2.80% A-
3-month LIBOR 0.25%
3-month Treasury 0.06%
TED Spread 0.19% B
Stock Market (Return over last 12 months)
Dow Jones 15% C
S&P 500 19% C+
Wilshire 5000 22% B-
S&P Super Homebuilding 18% C
Tougher Standards on Business Loans - Large Firms -6% B
Tougher Standards on Business Loans - Small Firms 4% C+
Crude Oil Price (Current $) $78.22 D
ISM Manufacturing Index 58.4 C+
ISM Non-Manufacturing Business Activity Index 52.2 C-
These statistics are probably the most important indicators of short-term housing market performance.
Conforming Mortgage Rates (contract rate; an additional 0.6 - 1.0 points are also paid up front by the borrower)
JBREC Affordability Index 1.4 A-
US Median Home Payment / Income Ratio 27.2%
US Median Home Price / Income Ratio 3.4 C
Mortgage Rates, Fixed 4.98% A+
Mortgage Rates, Adjustable 4.29% B+
Fixed/Adjustable Spread 0.69% D-
Fixed/10-year Spread 1.32% D+
Fed Funds Rate 0.15%
Percentage of Adjust. Loans 4.5% A-
Equity/Owned Home (Current $) $82,471 D-
Debt % in Home (LTV) 62.4% F
Median Household Income $53,293
- Growth Rate, nominal -3.9% F
Consumer Behavior
Consumer attitudes correlate well with short-term housing sales performance. Consumer income growth, debt levels and job prospects affect the long-term outlook for housing sales.
Consumer Confidence Index 55.9 D
Consumer Sentiment Index 74.4 D+
Consumer Comfort Index -44.5 F
Revolving Cons. Credit per Household $7,828
- Growth Rate -9.2% A+
Personal Savings Rate 4.8% C-
U.S. Net Worth Growth Rate -6.0% D
Financial Obligation Ratio 17.8% D+
Misery Index (Unemployment + Inflation) 12.70 D+
Existing Home Market
Sales volumes correlate well with the Housing Cycle calculations, and boost the trade up New Home sales market.
S&P/Case-Shiller® U.S. Price Index (YOY % Change) -8.9% D
NAR Single-Family Median Home Price $177,500
NAR Single-Family Annual Price Appreciation 1.4% C-
Freddie Mac Annual Price Appreciation -4.0% F
Annual Sales Volume, SA 5,450,000 B
Existing Home Inventory for Sale, SA 3,289,000 D+
Months Supply of Unsold Homes, SA 7.2 C
Purchase Mort. App. Index, SA 226.9 C-
Pending Home Sales Index, SA 96.6 D+
Homeownership Rate 67.2% B
New Home Market
High appreciation and low inventory would mean an excellent short-term outlook for the new home industry.
Housing Market Index 15 F
Multifamily Condo Market Index 24 D
Median Price, NSA $221,300
Annual Appreciation Rate -3.6% D
Constant Quality Price Index (YOY % Change) 0.2% D+
Sales Volume, SA 342,000 F
New Home Inventory for Sale, NSA 234,000 B+
Months Supply of Unsold Homes, SA 8.1 B-
Months of Homes Completed, SA 3.4 B-
Months of Homes Under Const., SA 3.5 C
Months of Homes Not Started, SA 1.2 C+
Repairs and Remodeling
High remodeling levels are good for the economy and are closely tied to consumer confidence.
Homeowner Improvement Activity (YOY % Change) -9.4% D-
Remodeling Market Index - Current 39.8 D+
Remodeling Market Index - Future Expectations 38.7 D+
Private Residential Construction (YOY % Change) -19.2% D
Residential Investment as % of GDP (nominal) 2.5% F
Housing Supply
High construction levels are good for the economy. However, if new supply exceeds demand, prices could fall.
New Housing Units Completed, SA 768,000 F
Single-Family Starts, SA 456,000 F
Multifamily Starts, SA 101,000 F
Total Starts, SA 557,000 F
Single-Family Permits, SA 508,000 F
Multifamily Permits, SA 145,000 F
Total Permits, SA 653,000 F
Manuf. Housing Placements, SA 53,000 F
Total Supply, SA 706,000 F
Total Housing Stock 130,587,000
Homeowner Vacancy Rate 2.7% F
SA stands for Seasonally Adjusted Annual Rate. NSA stands for Not Seasonally Adjusted.
* The best 15% ever are "A" scores, the average is a "C", and the worst 15% ever are "F" scores, with distributions throughout.

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John Burns
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