Just how cheap is US housing?

Consider Minneapolis, Minn. You could've bought, out of foreclosure, a three-bedroom, two-bath house of 1,356 square feet on a quarter acre lot for about $29,000. It needed a lot of work, but houses in the neighborhood recently sold for $75,000.

Your mortgage would be under $100 per month and about the same in taxes. You could've got $1,000 in rent. Even if you had to put $40,000 in the house, your gross yield would've been 17.4% on the property.

This is one example sleuthed by my friend Gary Gibson, former editor of Whiskey & Gunpowder. "The house had mould damage and needed a lot of work," he wrote. "Beautiful yard, however."

He found another similar house: three-bedroom, one-bath house. Built in 1907, it has 1,424 square feet of space. "It was on the market for $29,900." Gary wrote. "It seemed to be in very good shape and there were a few bids on it already."

Gary is a bargain hunter on the extremes of the housing markets. "I've been Googling 'cheapest cities you'd actually want to live in' and such for the past week," Gary continues. "Michigan and Ohio cities keep popping up. Lansing, Youngstown, Cleveland. Even Detroit.

You can buy houses for a few hundred bucks in Detroit! A couple shells are going for just $1. And I saw one listing for 20 or so houses sold all together for a little over $20,000."

"So instead of buying one house, one could buy a bunch and improve them and maybe rent them," Gary guesses. "That, of course, assumes one believes people are going to want to live in Detroit."

Cheapness alone is not a buy, as Gary surmises. But it is a good place to start. Demographia puts out a survey on housing affordability. It recently published its eighth annual survey. Nearby is a table of the top 15 most affordable markets. You'll see Michigan and Ohio get plenty of space.

Demographia's survey is international. So this top 15 is in the US, but beats out all of the markets under the survey. These include Australia, Ireland, Canada, New Zealand, Hong Kong and the UK. Also, as you see, Demographia's focus is on that median price to median income - called the "median multiple."

The median multiple has become the standard for affordability, used by the World Bank, the United Nations and many other organizations. Historically, the range of such multiples is between 2 and 3. This is true across all of the markets surveyed. Only in the 1980s and 1990s had it become common to have multiples beyond 3. Anything over 4 is unaffordable.

In any event, the US is tops in affordability ranked by median multiple. Take a look at the chart below titled "National Housing Affordability."

The median multiple allows you to go further. You can break countries down into specific metropolitan areas. Of all the major markets surveyed, Hong Kong came out as the least affordable at 12.6. Vancouver, Canada, was the second most unaffordable with a median multiple of 10.6 All the markets of Australian and New Zealand were severely unaffordable - which perhaps leads you to the next bursting housing bubbles.

The US, by contrast, dominates the affordability rankings with several cities below 2 and most in the range of 2-3. There are always exceptions. Honolulu, Hawaii ranked as the least-affordable market in the US, with a median multiple of 8.7. The median price of a home is $599,700, while the median income was only $69,300. Other unaffordable cities include: Santa Cruz, Calif.; Boulder, Colo.; Bridgeport, Conn.; and Santa Rosa, Calif.

It goes to show you that real estate is still intensely local. And it is hard to talk about "US housing" without stumbling into some pretty useless generalizations. The chasm that separates Honolulu and Detroit would be Exhibit A.

Even within states, there can be wide divergences. Look at the table below, which shows you the major metropolitan areas of Florida. This one is interesting not only for the gaps between cities, but also because even now affordability is still above where it was in 2000.

Florida is, to borrow a phrase, a stock picker's market. There are certainly bargains there, as our interview with 13th Floor Investments revealed. But it is, on the whole, not as cheap on the median multiple measures as other US markets - or even against its own recent history.

Then again, it is easier to see that Miami, Orlando, et al., are viable US cities that will be around in 10 years. It is a harder call for some of these places in the heartland where the economic organs have been transplanted and a return to glory is no sure thing. This gets to Gary's wondering about whether people will want to live in Detroit.

Even so, US housing is, in the main, cheap as is. Rents in many markets support prices delivering 8-12% yields to investors (and much better if you are willing, as Gary is, to explore the fringes).

I turned bullish on US housing in January 2011. I did this after being a housing bear for about a decade. But the housing bubble that I feared has long since popped. Good bargains abound.

Since January 2011, I've talked to several investors focused on housing. Chief among these was Aaron Edelheit at the American Home Real Estate Co. and Arnaud Karsenti at 13th Floor Investments. Their experience confirms the deals that exist. We've also looked at a number of other arguments in favor of housing - including the fact that interest rates sit near record lows.

The market is already improving. Through May 2012, new homes sales are up 18% from a year ago. And while the actual number of sales is still very low, the worst is clearly behind us. Sales were the best in two years. Prices have already started to climb. The May data show a 5.6% increase in the national median housing price.

Housing starts, too, are up 26%. There is even a shortage of housing lots in the more-desired locations, with bidding wars between builders. Foreign money continues to flow in US real estate. For example, most recently, the Chinese are looking to invest $1.7 billion in a large- scale housing development in San Francisco.

So I repeat my bullishness on US housing here: US housing is a buy. It is a cheap asset. Look to buy a house and rent it. (I've done it myself.) By the time the mainstream gets onto the idea, the bottom will be years behind us.

Regards,

Chris Mayer
for The Daily Reckoning Australia

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