housing affordability continues to decline

housing prices are now ready to fall for fundamental reasons.

so far, prices have only been falling because the speculative fever came to an end. all of the get rich quick schemes quickly unwound and a lot of people who obviously never should have "bought" had to give their houses back to the bank.

but now the hard part starts. housing affordability is falling faster than housing prices because of rising interest rates and tightening lending standards. falling affordability will prevent people who would normally be buyers out of the market.

interest rates on 30yr fixed loans are the highest they've been in 5 years and are likely to continue rising because 1) the Fed reserve rate will probably be increased on inflation concerns, 2) the biggest loan buyers are losing the ability to buy more debt, 3) the losses on all types of loans recently has scared loan buyers into demanding higher interest rates to cover higher expected losses. these factors have already pushed rates from 5.25% 6 months ago to 6.50% today. that represents a 12.5% decline in affordability or a 14.5% increase in monthly payment for the same size loan.

lending standards for the buyers of most of the country's home loans are about to be increased by an act of congress. people will actually have to make a down payment. of cash. their own cash. that they can prove is their own cash and not a loan or gift from the seller. it'll still only be 3%, but that is 3% more than most people have been putting down for the last few years.