securities portfolio roll off once the Fed winds down
its securities purchase programme this fall. Both
proposals recognise that there has not been enough
improvement in the housing market to begin to
withdraw the extraordinary support put in place over
the past few years.
Affordability
But let’s talk about affordability and debt as an
indicator of growth potential. Understanding how
financing drives home values in the U.S. will help
you profit from “blue sky” sub-markets and avoid
the pitfall of investing in overvalued markets.
Some noteworthy stats:
• 65% of Americans own their home vs. rent
(down from 69% in 2004)
• 71% of homeowners have a mortgage, hence, the
importance of following availability of
financing and it’s cost – Americans don’t buy a
purchase price, they buy a monthly payment.
This is a ver y important paradigm shift for
www.reimag.co.za
residential investors: home prices are a product of
our capital markets.
Consider the two scenarios:
Home price: $200,000
Conventional loan down payment (20%): $40,000
Mont h ly pay ment on t he ba la nce (30 -yea r
amortization, 5% rate): $859
The same loan at 6% rate (1% point higher than the
example above) produces a $959 monthly payment.
If we apply the same debt-to-income ratio, the
home would have to be priced at $179,125 (more
than 10% less) to result in the same $859 monthly
debt burden.
With mortgage rates expected to return to historic
norms in the coming years (6.5% is “normal” in the
U.S.), home prices would have downward pressure
with a 2% on a 30-year mortgage. In this case,
the principle and interest payment on 80% of our
purchase price would be $748 per month.
Offshore Handbook 2014
41