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Housing still too expensive despite positive signs

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Home sellers out of touch

Mortgage rates are attractive. Home price gains are easing. Employment is improving. So why aren't more people buying houses? Sales are rising slightly month-to-month but are still well below where they were last year. The answer is pretty simple: Too many people can't afford to buy homes.

"Despite this national slowdown in price gains, price increases continue to be widespread, with 97 of 100 metros [metropolitan housing markets] posting year-over-year price gains—the most since the recovery began," according to Jed Kolko, chief economist at Trulia, a real estate sales and data company. "Furthermore, asking prices in June rose at their highest month-over-month rate (1.2 percent) in 16 months."

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Big price gains began early in 2013 as investors swarmed distressed markets, buying up homes to turn around as rentals. While the biggest jumps were in markets like Phoenix, Las Vegas and much of California, other local markets followed, driven not by investors, but by short supply of homes for sale. That led to bidding wars. Sellers, say real estate agents, are now completely out of touch with what buyers can stomach.

Read More Investors get schooled in housing

"In May, 40 percent of sellers surveyed by Redfin said that they planned to list their homes above market value even though home sales had dropped by 9 percent since the year before," the real estate brokerage's chief economist, Nela Richardson, said. "Typically it takes sellers six to nine months to adjust to a price change, but this latest shift is longer. Prices have moved down and then up so much over the past five years that it's even more difficult for sellers to have a realistic baseline for what their homes are worth in the current market."

TABLE Where Asking Prices Rose Most Year-over-Year, June 2014 140709

&nbsp; U.S. Metro "Y-o-Y % asking<br> price change <br> June 2014 " "Y-o-Y % change in<br> wages per worker <br> 2013 vs. 2012 "
1"Riverside-San Bernardino CA "16.9%0.6%
2"Atlanta GA "15.7%0.8%
3"Grand Rapids MI "15.3%0.4%
4"Miami FL "14.6%0.9%
5"Detroit MI "14.5%0.6%
6"Bakersfield CA "13.9%-0.3%
7"Chicago IL "13.8%0.3%
8"Lake County-Kenosha County IL-WI "13.6%2.0%
9"Birmingham AL "13.6%0.4%
10"Cape Coral-Fort Myers FL "13.4%0.7%

As investors move out, the market is left to regular, owner-occupant, mortgage-dependent buyers. Mortgage applications to buy an existing home are down 10 percent from a year ago, and a report Thursday from the Mortgage Bankers Association finds loan applications to purchase a newly built home fell 5 percent in June from May. While supplies of homes for sale may still be slim, sellers cannot claim the sky is the limit on price, especially with a tighter mortgage market standing in the way.

Accordingly, less than one quarter of the Redfin agents surveyed said it is a seller's market, down from 35 percent just three months ago. Sellers are in the weakest position in the Midwest, while buyers nationwide are walking away from bidding wars because homes are significantly less affordable and credit is still comparatively tight, according to Redfin.

Read MoreMortgage volume remains stuck despite lower rates

Members of the Federal Reserve's Board of Governors noted the disconnect in their most recent meeting, as noted in the minutes released Wednesday: "Despite attractive mortgage rates, housing demand was seen as being damped by such factors as restrictive credit conditions, particularly for households with low credit scores; high down payments; or low demand among younger home buyers, due in part to the burden of student loan debt. ... Several other participants suggested the possibility that more persistent structural changes in housing demand associated with an aging population and evolving lifestyle preferences were boosting demand for multifamily units at the expense of single-family homes. "

Unfortunately, affordability concerns are not limited to the home-buying market. Rent is also rising and taking a larger chunk out of people's paychecks.

TABLE Rent Trends in the 25 Largest Rental Markets 140709

&nbsp; U.S. Metro "Y-o-Y %<br> change in rents <br> June 2014 " "Median rent<br> for 2-bedroom <br> June 2014 " "Median rent for<br> 2-bedroom <br> as share of average<br> local wage "
1"Miami FL "10.1%" $2,450 "62%
2"New York NY-NJ "4.5%" $3,500 "56%
3"Los Angeles CA "6.1%" $2,350 "51%
4"Oakland CA "12.6%" $2,550 "49%
5"San Francisco CA "13.8%" $3,550 "48%
6"Riverside-San Bernardino CA "5.9%" $1,550 "46%
7"San Diego CA "10.5%" $2,000 "44%
8"Orange County CA "3.4%" $2,000 "44%
9"Boston MA "4.7%" $2,400 "42%
10"Washington DC-VA-MD-WV "2.6%" $2,200 "38%
11"Baltimore MD "7.8%" $1,600 "36%
12"Chicago IL "7.3%" $1,650 "36%
13"Seattle WA "8.4%" $1,850 "34%
14"Philadelphia PA "7.2%" $1,600 "33%
15"Denver CO "10.8%" $1,500 "32%
16"Tampa-St. Petersburg FL "4.6%" $1,100 "30%
17"Portland OR-WA "3.5%" $1,250 "30%
18"Dallas TX "4.4%" $1,400 "29%
19"Minneapolis-St. Paul MN-WI "3.5%" $1,300 "28%
20"Houston TX "3.9%" $1,450 "28%
21"Sacramento CA "9.8%" $1,200 "28%
22"Atlanta GA "8.6%" $1,200 "27%
23"Phoenix AZ "7.0%" $1,050 "26%
24"Las Vegas NV "4.4% $950 26%
25"St. Louis MO-IL "5.1% $950 24%

"Rent increases outpaced wage increases in all of the 25 largest rental markets. Rents rose more than 10 percent year-over-year in Miami, Oakland, San Francisco, San Diego, and Denver," noted Trulia's Kolko. "Among these five markets with the largest rent increases, all but Denver are among the nation's least affordable rental markets."

The rent increases present a cruel irony. New mortgage rules, designed to protect borrowers, set strict limits as to the amount of loan debt that can be carried as a percentage of a borrowers' income43 percent. This so-called debt-to-income ratio has kept some renters out of home ownership, but in 8 of the nation's 10 largest housing markets, the median rent, as a share of the local wage, exceeds 43 percent, according to Trulia. In some cases, monthly rent is more than half of the average local wage.

Read More Mortgage volume remains stuck despite lower rates

Even though a monthly mortgage payment on the average house in the typical U.S. market is likely lower than a rent payment, renters today cannot come up with the down payment to buy and/or they don't have the credit to qualify. First-time buyers are sidelined, and even move-up buyers don't have enough equity in their home or liquid cash to purchase another home. Housing crashed. Prices plummeted. And yet, home ownership is still out of reach for too many Americans.

—By CNBC's Diana Olick.