The National Association of Realtors reported that existing home sales fizzled in Februrary, falling to a seasonally adjusted annual rate of 5.08 million. This was a sharp decline from January numbers but 2 percent higher than a year ago. NAR’s chief economist, Lawrence Yun, mentioned the stock market, poor weather on the East coast, as well as supply and affordability issues. At least he got one of the four correct!

The real problem surrounding the U.S. real estate market is a lack of affordability. Home prices have been levitated back to the previous bubble levels (and higher in many cases), even as real income growth for most Americans has stagnated. If it weren’t for capital flight out of China and all of those cash “investors” in U.S. homes, actual sales volume would be even weaker. Of course trying to explain this to your typical real estate practitioner is something that likely won’t earn you any friends.

Looking at the picture here locally, the actual “affordability” has been severely damaged by runaway property taxes. I was browsing local listings yesterday, and it was alarming how many homes were on the market with CAD (central appraisal district) valuations exceeding the actual listing price. I knew our own appraisal district overshot the market in many cases last year, but now the evidence is piling up in the actual listings. For the media pundits who continue to advertise the “affordability” of Houston area homes, here are some uncomfortable truths.

As noted in the above chart, our housing affordability index is still registering well above 100. The 12-month average through February of this year shows an affordablity index of 163. This suggests that the median household income in Houston is 163 percent of what’s needed to qualify for a median priced home in Houston. The 12-month average of a median-priced Houston home through February 2016 was $209,000. The latest Census data for Houston show a median household income of $60,072. Let’s do the math on those “affordability” calculations.

Most rational mortgage lenders want to see a front-end DTI (debt-to-income) ratio of 28 percent or less and a total back-end ratio not exceeding 36 percent. This means that your total mortgage payment shouldn’t exceed 28 percent of your gross monthly salary, and your total debt outlays shouldn’t exceed 36 percent of your income. So what’s 28 percent of $5006? (median household income in Houston TX). The answer is $1401.68. So assuming conventional conservative lending practices, your monthly mortgage payment on this $209,000 home should be about $1400 or less. Is this even possible? Let’s look at a real-world example and add the numbers up.

Assume you are fortunate and have a 20 percent down payment (not likely), here’s the math…

  • $774.33 – monthly P&I payment on 30-year mortgage of $167,200 at 3.75 percent
  • $522 – monthly property tax obligation assuming 3 percent tax rate.
  • $100 – monthly hazard insurance cost
  • $50 – monthly homeowners association dues
  • Total – $1446

As you can see, the real world cost of $1446 is actually HIGHER than the $1401.68 threshold for qualifying ratios, and this is with some very optimistic assumptions. Even if you homestead and reduce the property tax obligation by 20 percent (down to $417 per month) you still end up with a total monthly bill of around $1341 per month. That is less than the DTI limit. Fair enough, but is your median income 163 percent of what’s needed? Of course not! To get to that figure, your annual “median” income would need to be $93,678!

Let’s look at a more likely situation in this price range where a real owner-occupant borrower only has a 5 percent down payment. Here’s the math again with more realistic assumptions…

  • $919.52 – monthly P&I payment on 30-year mortgage of $198,550 at 3.75 percent.
  • $90 – monthly mortgage insurance paid to lender (PMI)
  • $522 – monthly property tax obligation assuming 3 percent tax rate.
  • $100 – monthly hazard insurance cost
  • $50 – monthly homeowners association dues
  • Total – $1681

As you can see, this is a full $280 HIGHER than the front-end 28 percent DTI limit. While it’s true that you may be able to reduce the property tax obligation by filing for your Texas homestead, you certainly won’t be able to cut that monthly outlay by $280. You’ll be fortunate if you can reduce the property tax portion by 10-20 percent. Let’s assume for humor’s sake that you get your homestead with a 20 percent reduction and the property tax portion of your bill falls to $417 per month. That still leaves you with a monthly payment of $1576.

If you were really making 163 percent of the money to qualify for this home, your annual “median” income would need to be…$110,094!

Don’t get me wrong, owning a home is a wonderful idea if you can afford it. What really irritates me is industry pundits who continue to dismiss all of the manipulation and distortion in our real estate markets, or try to make expensive crap shacks look like a good deal. It saddens me to see that homes have been turned into speculative investment vehicles for a small subset of the population. The merits of owning a home are sound, but that doesn’t matter much when the entire economic backdrop has morphed into a giant Ponzi scheme which serves the interests of the few at the expense of the many.

Things that make you go Hmmm!