Is housing really affordable, as this picture states?

The last six months, housing affordability has been one of the few give-ins regarding housing. With record-low interest rates and competitively-priced homes, affordability is at its highest level in more than 40 years…or is it?

A new study by mortgage consulting firm Andrew Davidson & Co. is arguing that affordability in the current market may not be all it’s cracked up to be.

The paper argues that when homeownership’s total costs – meaning, the share of a borrower’s income that a home purchase requires – are viewed in both today’s market and the boom years, the costs are the same.

Here’s the paper’s logic: yes, prices and rates are low, but lending is still tight, and with down payment requirements and other strict financing terms, buying a home is just as costly as during the boom years, when financing was cheap and seemingly anyone could own a home. So while rates and prices appear lower, relatively speaking, they’re not much to ride home on.

“Home affordability needs to be considered in light of the full financing package,” said Andrew Davidson, one of the study’s authors, in a Wall Street Journal piece. “During the bubble the low all-in cost of mortgage financing allowed borrowers to purchase homes, even at inflated prices.”

Some interesting data isolated by the Journal:

• Looser down-payment requirements during the boom years (2000 to 2006) decreased homeownership costs by 15 percent.
• Since 2006, tighter financing has raised costs by 22 percent, offsetting any benefit from the drop in rates.
• Overall, the paper estimates that costs were 9 percent of property values in 2011, compared to 7 percent in 2006.
• Loan payments today make up roughly half of costs today, which is “rather modest by historical standards,” the paper says. “This explains why the record-low interest rates do not impress borrowers and do not propel home prices up.”

Geoff Smith, of the Institute of Housing Studies at DePaul University, an institute that studies national and local housing markets, said that though he found the study’s premise interesting, lending is really just one part of the housing market.

“I don’t know if I can say that this one factor is what is holding back the housing market,” Smith said.

Instead, Smith said lifestyle choices – stuff like the desire to rent vs own, preferences for living accommodations, etc. – and the wider economic recovery are equally useful to gauge prospective homebuyer interest. And there are signs that the greater economy is growing, with Fannie Mae’s latest economic indicator reporting a “cautious optimism” for housing.

Also, in light of Smith’s reference of renting and owning, that dichotomy represents an interesting challenge to the study’s findings. In Trulia’s latest Rent vs. Buy Index, the site found that only two metropolitan markets in the entire country (New York City and Honolulu) had housing prices that justified renting rather than buying; that’s right – in every other market, from Chicago to Los Angeles to Houston, it’s more affordable to purchase a home, with all the supposed costs the study claims, than rent.

So is affordability really a mirage? It seems like quite a few people are seeing it just fine!