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The measurement of home prices was covered in the previous entry. But these home prices don’t exist in a bubble; they exist in real communities that have real people with real jobs and incomes, and affordability actually lies in whether the average Joe in any given place can afford to buy at the median home price. If the median price for an existing single-family home in the West is at present $247,800, how many of the folks in that area make enough money to be able to comfortably afford that price?
In addition to median home prices, the NAR publishes the Housing Affordability Index. This index takes into account several factors, and gives you an idea of what it takes to afford a house in any given region.
The index, which is calculated over time and by region and is available at www.realtor.org/topics/metropolitan-median-area-prices-and-affordability/data under “Affordability Data,” compares median home prices to median income and determines whether the median income affords exactly the median home (index=100), affords more than the median home (>100), or affords less than the median home (<100). Factors included in the affordability calculation include the median price, the average mortgage rate, monthly principal and interest payment (P&I), payment as a percentage of income, the median family income, and the qualifying income. The calculation assumes a down payment of 20 percent and a total P&I payment not exceeding 25 percent of median income.
Here’s how the calculations work. Suppose we want a snapshot of housing affordability in the Midwest for example. Assuming a standard 20 percent down payment on a single-family house with the current median price of $143,100 at a mortgage rate of 3.66 percent and a thirty-year, fixed-rate mortgage (360 payments), the monthly P&I would be $526. This would be 10.1 percent of the $62,359 median family income in that area. In order to qualify for that loan you would have to have an income of $29,088, giving an affordability index of 206. So, is Midwest housing affordable based on this measure? You bet.
Why You Should Care
Housing affordability, like the median home prices, can help you determine whether a certain area or region can provide the kind of lifestyle you want at a reasonable price. Of course, beyond median family incomes, whether you can afford an area depends on what you earn, not the averages, and it depends on the home you choose. Still, housing affordability helps you make important lifestyle choices, and it also helps indicate whether real estate prices in a locale are in line with reality.
90. FORECLOSURE/SHORT SALE
Not too long ago, the words “appreciation” and “opportunity” were the first to come to mind when the topic of real estate came up. Then came the bubble and the bust, and the words “foreclosure” and “short sale” dominated the listings and the conversation. Since then, the number of foreclosures has dropped significantly, but they still stubbornly remain an important part of the market, at least for the time being.
Foreclosure is a formal process that occurs when an owner ca
What You Should Know
Foreclosure is a lengthy and costly process that typically starts with a notice of default, which goes out when a payment is 60–90 days overdue. At that point, as an owner/borrower, you still have time to cover the obligation or arrange an alternative. After 90–120 days, the notice of default turns into a notice of sale where a court determines that a lender can start sale proceedings and evict the owner. When the title is transferred to the lender, it is known as real estate owned (REO), especially if the lender is a bank. Banks and other lenders, as a result of the huge numbers of foreclosures that occurred in 2008–2010, ended up owning far more property than they knew what to do with (see #88 Median Home Price). Just as bad, the foreclosure process is estimated to cost the lender some $50,000 to $60,000 to carry out.
Because of the glut of REO and the cost of fully pursuing foreclosure, many lenders opted to accept proposed short sales. A short sale is a negotiated deal between the borrower/owner and lender to accept a lower price on a sale to a third party, and in turn the lender is willing to accept less than the full amount owed for a property on which they hold the mortgage. Often the seller has little or no equity and might even owe more than the property is currently worth, and the seller usually must convince the lender that the situation is due to financial hardship. Regardless, it can be a win-win, for the borrower/owner gets out of the home and doesn’t take the hit of a foreclosure on the credit record, while the lender doesn’t take on any more REO, saves fees, and doesn’t have to worry about property deterioration while held as REO.
A borrower/owner must approach the lender for the short sale; the lender will not propose it. The owner must also show effort in trying to sell the property for market price for some period of time.
Why You Should Care
You don’t want to go through foreclosure, if at all possible. Not only do you lose your home and any equity you might have built up in it, but your credit rating can be blemished for as long as ten years. If you’re in trouble, you should evaluate all options, including short sales, deed in lieu of foreclosure (where you simply hand the keys back to the bank), and an assortment of government programs that continue to be in force, although they tend to have fairly strict qualification guidelines.
It’s also worth learning the mechanics of foreclosure if you’re a buyer. Foreclosures and short sales signal opportunity, and if you play the game right, you can still get a bargain. Most local realtors have developed the skills and knowledge (by necessity!) to deal in foreclosed homes.
CHAPTER 8
Trade and International Economics
Even on our small planet, no nation exists in a vacuum. Sure, the United States is blessed with abundant resources to grow food, build shelter, and accomplish the routine tasks of daily life. But we don’t have everything. We’ve always been dependent on foreign nations for some things like coffee or saffron spice or chromium. We had become increasingly dependent on other nations for energy, but with recent domestic production through so-called “fracking,” that’s become less true, demonstrating once again that necessity is the mother of invention. But that said, increasingly, we’ve found that many of the goods and services we need can be produced elsewhere for less—although that trend, too, is showing some signs of reversing. In general, global trade has its advantages and disadvantages, which will be further explored in this chapter in the discussion of globalization.
At the same time, foreign societies need American goods and services. In general, all countries need things that other countries produce, giving rise to a global economy consisting of many local economies and a trade system to co