Studies Show Affordable Housing Declining Throughout Florida and Across the Country

Try as a town might to make housing affordable, a booming real estate market sure can thwart that effort.

Those familiar with Central and especially South Florida real estate know this all too well. Take the experience of Celebration, Fla., the booming 10-year-old community located just outside the gates of Orlando’s Walt Disney World.

Prices are through the roof, and the town is trying to build smaller, less expensive houses, according to town architect Mark Jones said. But it has become a somewhat fruitless endeavor.

“Almost every time, sale prices rise faster than we can build,” he said.

This kind of situation is hardly unique to Florida. According to the National Association of Realtors (NAR), fewer Americans could afford to buy a house in 2005 than in 2003, although existing-home sales numbers have been hitting record levels in the last three years. The issues at stake are prices increasing faster than both annual income and mortgage rates. Since 2003, the median home price nationally rose to $207,300, up from $170,000.

National rates for 30-year, fixed mortgages, which are around 6.25-6.30 percent today, averaged 5.74 percent in 2003. This increase boosts the monthly principal and interest payments on a median-priced home to $985 from $793. What this means is that to buy a $207,300 house, assuming a 20 percent down payment and a 25 percent qualifying ratio, a buyer will have to have a median annual family income of $57,214.

In 2003, the income needed was $52,682. That is a significant difference. But does it mean things are sliding downhill fast? Not necessarily.

“[The changes] are subject to seasonal and slow variations. When the index was created in 1981 the typical lending criteria, assumptions and mortgage instruments were much different from what they are today,” NAR spokesman Walt Molony said.

What he mans is that in 1981, with Florida home loan rates at historic highs, the lower-rate adjustable mortgages we see today weren’t widely used, and down payments were usually the standard 20 percent. Because of that history, the index is “a fairly conservative measure” of affordability in today’s lending environment, Molony explains.

• The lowest payment, as a percentage of annual median income, was 16.2 percent, in 1972.
• By contrast, the highest on record was 36.3 percent in 1981, when fixed-rate mortgages peaked at an incredible 18 percent.

The NAR began tracking affordability for first-time buyers in 1977, and has concluded that in the past 30 years, it has always been a challenge for first-time buyers to afford a home. So much so these days that the median down payment is only 2 percent — far less than the 10 percent used by the Realtors in their affordability calculations.

In the last two or three years, especially in the expensive California, Nevada and South Florida real estate markets, buyers have turned to what are known as “exotic mortgages” in large numbers. These interest-only and option adjustable loans allow people to buy a more expensive home with fewer financial resources. The large volume of these loans has led the Office of the Comptroller of the Currency to issue guidelines.

“Although interest-only and adjustable loans can initially save a typical home buyer hundreds of dollars in monthly payments, these loans also leave borrowers vulnerable to sharply higher payments when interest rates adjust or principal payments start to become due,” said Nicolas Retsinas, director of the Joint Center for Housing Studies at Harvard University.

“With the number of borrowers vulnerable to payment shocks up, default rates predictably several times higher for subprime loans than prime loans and house prices growing at such rapid rates, the housing market could deteriorate if the economy softens or if rates increase sharply,” he added.

Despite efforts everywhere to address affordability issues, such as we are seeing in both Palm Beach County and Broward County, they persist. The numbers of households spending more than half their income on housing increased by 2.5 million between 2000 and 2003. The nation’s building industry, rebuffing criticism, blames local regulations for its inability to increase affordable housing.

They might not be entirely off base. A study by the Pioneer Institute for Public Policy Research and Harvard’s Rappaport Institute for Greater Boston shows that local government regulations added as much as 30 percent to the cost of a new home. The study found that communities in Massachusetts often increase minimum lot sizes by so much that few new homes are permitted and demand spikes accordingly.

The California Building Industry Association, in its own study, called the “not-in-my-backyard” attitude the chief cause of rising prices in the Golden State. The chairman, Layne Marceau, said that in Livermore, Calif., 20 miles east of San Francisco, impact fees and regulatory costs now add $120,000 to the cost of every new home built. He said a proposed moderate-density solution must be backed by the American Planning Association.

Something has to be done, or these markets will see an exodus of talented workers unable to afford to live. Perhaps areas of Miami real estate that are currently overlooked, and hold the potential for sustainable urban development, can help ease the crunch in South Florida.