The Appraiser's Perspective: More expensive, yet more affordableCharlie W. Elliott Jr., MAI, SRAhome prices, inflation, cost of building homes
A sure sign that we're in a new year is that a lot of study
results are coming our way. Primarily, these are conclusions of
studies that had been conducted the previous year. Three of them
appear to be particularly interesting:
1. A National Association of Home
Builders (NAHB) study revealed that the cost of building homes
increased dramatically last year;
2. A National Association of
Realtors (NAR) study concluded that the U.S. median home price
rose a whopping 13.6 percent in 2005; and
3. A report published by Moody's
Economy.com indicated that housing in the United States has
actually become more affordable as a whole.
Now, the conclusions of the first study on the above list
certainly blend in with the conclusions of the second study.
However, the results of the third study seem rather contradictory
to the first two in light of the reports generated from the first
two studies. How can that be? In order to try to find an answer to
this question, we need to take a closer look at the above three
The NAHB report concluded that prices of building materials
increased by about 10 percent last year. Hurricane Katrina and her
evil sister Rita caused a spike in the costs of concrete, PVC pipe
and other products, which led to building materials overall going
up in double figures. Higher interest rates and energy costs also
contributed to the increasing home building costs. The NAR study
showed that home prices are going up accordingly. It must be
pointed out that the 13.6 percent figure is the median, not the
average. What this means is that half of the homes went up by more
than 13.6 percent and the other half rose in price by less than
13.6 percent, not counting the few that actually rose by exactly
13.6 percent. At press time, the Office of Federal Housing and
Enterprise Oversight (OFHEO) released a report that stated that
the average U.S. home value increased by 12.95 percent in 2005. The
OFHEO also noted that other goods rose by only 4.3 percent last
year. While expenses (in this case, building costs) are a key
factor in pricing, it's fair to say that the law of supply and
demand takes center stage in real estate pricing. Demand has really
skyrocketed in the greater Washington, D.C. area, as well as in
several states, including California, Arizona and Florida. It's
also important to note that this same study showed that price
increases actually cooled down a bit during the fourth quarter of
2005 and that David Lereah, NAR's chief economist, predicts that
this trend will continue.
Now, let's move on to the Moody's study. It concluded that
housing is more affordable in this country. The report on Moody's
Economy.com Web site, www.economy.com, determined that
the percentage of a typical American family's income that was
needed for mortgage payments was 30 percent in 1982. By 2005, that
figure had dropped to 22 percent. So the fact that houses as well
as building materials have seen significant increases has not led
to an adverse effect on housing affordability. The study gives
three explanations of that in its conclusion: low interest rates,
higher incomes and more housing.
As previously stated at the beginning of this column, those
studies were about last year. As businessmen and businesswomen, our
concern is now about this year and beyond. So let's take a look at
those reasons and see if we can continue to count on them.
The lowering of the interest rates earlier in the millennium was
a godsend to our businesses and the economy as a whole. Housing,
construction, real estate and the financing of this activity truly
drove the economy during troubled times in the wake of Sept. 11.
Now, interest rates are creeping back up, but some economists have
predicted that these increases will end after this month. If
interest rates hold from here on out, they will remain historically
low. Rising incomes are not quite such a sure thing. The U.S.
economy has lost a lot of manufacturing jobs in recent years.
Meanwhile, most of the new jobs created are coming from the service
sector, and these jobs typically do not pay as much. Many employers
are increasing wages and salaries to keep up with inflation, but
the changing of the guard from the manufacturing sector to the
service sector is a bit unsettling. The new construction going on
is encouraging. We have seen a lot of construction draw inspections
in our business and yet another study, this one by the U.S. Department of Commerce,
reported that this past January saw home building activity churning
along at a record pace. The report said that the construction of
new homes and apartments was 14.5 percent higher in January than it
had been in December. Construction was at a seasonally adjusted
annual rate of 2.276 million units, which makes it the highest
construction rate since March 1973. Single-family home construction
rose 12.8 percent to 1.819 million units - the highest ever - and
multi-family units went up 21.9 percent to 457,000 units. And
there's more - the issuance of building permits in January was an
impressive 2,217 units. Since building permits are not affected by
the weather, I look at this as a sign that home building will be
strong throughout 2006.
I would be remiss by failing to mention that the Moody's study
did point out that housing affordability is definitely not
guaranteed throughout the country. In parts of California and New
York, as well as in the Boston and Chicago areas, the percentage of
family income required to pay home mortgages currently exceeds 40
percent. It is in areas like these where construction should be at
its fastest pace. This should improve the affordability issues in
In conclusion, we all have a lot at stake when it comes to the
housing in this country. Lenders, builders, real estate agents,
appraisers, suppliers and homeowners, not to mention those catching
a ride on the waves in other businesses, are all stakeholders.
While there is not yet any substantial proof of a housing
recession, I plan to approach the housing market in my business
with cautious optimism and suggest that you do so also.
Charlie W. Elliott Jr., MAI, SRA is president of Elliott
& Company Appraisers, a national real estate appraisal company.
He can be reached at (800) 854-5889, [email protected]
through the company's Web site at www.appraisalsanywhere.com.
Previous columns he has written for The Mortgage Press can be seen
on the Elliott & Company Web site.