The Affordability Gap

Apparently the FDIC is finally noticing that housing prices are raising faster than personal incomes. As the article notes, "In California, prices rose 22 percent and incomes 4.8 percent; in Nevada, home prices surged 28 percent while incomes rose 4.7 percent, the FDIC said." This creates a condition where innovative loan products (40 year mortgages, no money down, interest only) are proliferating. As I noted in a previous post, 61% of mortgages in California are interest only. This creates a condition where people are being approved for loan amounts they could not previously qualify for under the assumption they will be able to re-finance or sell their home. The unintended consequence is that people often buy much more house than they can afford, thinking their home will appreciate or they can sell. Another classic quote from the article;

"The FDIC and other banking regulators are studying the correlation between new adjustable-rate mortgage products, including interest-only loans, and higher home prices.

The studies are designed "to understand the extent to which these new credit factors may be contributing to home price growth," said Barbara Ryan, associate director of the FDIC's division of insurance and research."

I don't think it takes a lot of research to find that these two are related. I do find it amusing that they are just now looking into it. Too little, too late. When the gap between incomes and housing prices continues to grow like this, it can only mean long term problems for the real estate and mortgage markets.