Will 2012 Offer Greatest Affordability of Real Estate in a Generation?

It wasn’t so long ago that there was a widespread belief that real estate values went only one direction – up.  Of course, that was never true, and there was always ample evidence that real estate was at least somewhat cyclical.  When I first began selling real estate – several years before the top of the cycle – housing affordability was already very poor; prices in my local market were already far too high for the average buyer.  A shrinking number of first-time buyers were considered able to “afford” an “entry level” home – and that’s assuming they had a 20% down payment, which almost nobody did. By the time we reached the peak of the boom the housing affordability index had plummeted.

Housing affordability

Fortunately, the banks had come up with all kinds of great solutions to the housing affordability issue:  100% financing, negative-amortization loans, teaser rates, “liar loans” – you’ve heard about all of this.  Quite simply, these kinds of risky, exotic loan solutions are what it took for the average would-be homebuyer – that’s people like me and, statistically speaking, you – to get into an “affordable”, “entry level” home.

I’ve been selling residential real estate since 2003, there were a handful of nay-sayers, people who said that these prices were not sustainable, it was all a mirage, that the prices would have to come down.  Those people were tarred and feathered – figuratively, at least – and driven out of town.  Their voices were drowned out by the media that did not care to dig too deeply into what was going on, and also by a real estate and mortgage community that was fat and happy and for the most part also drank the kool-aid, thinking that prices would just keep going up and up.  The issue of ever diminishing affordability was rarely if ever addressed by the mainstream media – but so long as the market kept rolling along, few seemed to care.

Eventually, though, the market hit a lull.  While it happened at different times in different places across the country, the overall impact was clear. Between the years of 2005 and 2007, the nationwide housing bubble wilted, withered, and eventually imploded.  The cycle had changed gears, and the market was standing at the peak, looking down into a deep abyss.

In 2008, things really got rolling when the sub-prime mortgage crisis shook the world.  All of a sudden, the easy money was gone – highly indebted home owners could not refinance, and new sub-prime buyers could not get loans.  Demand dropped like a rock, and the foreclosure tsunami came rolling in, washing the American Dream out to sea for millions of hard-working American families.

Since 2008, real estate prices nationwide have been going down.  Congress and the President have tried a number of different initiatives (under the umbrella of Making Homes Affordable) to bolster the market and stem the tide of foreclosures.  There have been some modest successes in my opinion – but overall, the problem is simply too big for a quick fix or a one-size-fits-all solution. To give you an idea of the scope of the problem, as of the second quarter of 2011 bank-owned homes, which are sold after being repossessed, accounted for nearly 19 percent of all sales. That is roughly six times the percentage of foreclosures one would expect to find in a healthy housing market. At present, 1 in every 111 houses in the U.S. has a foreclosure filing, and every three months 250,000 new properties enter into foreclosure. Needless to say, it looks as if the foreclosure explosion will be with us for years to come.

Any old wife will tell you: every dark cloud has a silver lining.  In point of fact, the swift collapse of home values is extremely beneficial in many respects.  In my market area, home affordability has gone from below 25% to 70% and rising! Lower home prices, of course, translate into lower housing payments – which leave much more money in the pockets of homeowners.  Instead of flushing millions of dollars per month into bloated mortgages which lead straight out of the community and dump onto Wall Street – those extra dollars are, in large part, spent right on Main Street in home towns across America.  This serves to create stronger communities through higher employment and sales tax revenue.  Families have more disposable income to spend on things like groceries, travel, diversion, furniture, that new swimming pool they’ve always wanted – you get the picture.

But wait – there’s more!  Not only has home ownership become more affordable, in many cases, it may actually be cheaper to buy a house than to rent it.  In many areas of the country, this is a sea change:  not only is it affordable for the average working-class family to buy a house, in many cases it just makes financial sense. Opportunity like this hasn’t been seen in many communities around the nation for some time – and it  certainly won’t last forever.

It’s an open question, of course – how long will it be before house prices start rising again, and the affordability index starts going back down again?  Will 2012 be the high water mark for housing affordability for this generation?  There is no way to know that, of course.  There are few sure things in life – death and taxes are pretty much all we can count on.  However it may be that the calamity which has struck the nation may be ebbing, and that the time has finally arrived for folks to once again consider investing in the American Dream.

About sebfrey

Seb Frey is a happily married husband and father of two boys, living in a sublime corner of the Shire known as Aptos, CA. He is a real estate broker and entrepreneur, slavishly dedicated to creating Quality and Value.


  1. Very Inspirational Seb! Thanks for taking the time to write down your thoughts. We hope to be a working family that benefits in 2012!