Cheap Digs

Jonathan Clements

HOMES HAVE BECOME less affordable. But this still looks like a good time to buy a house or trade up to a larger place, especially if you’ll need to take out a mortgage.

Affordability hinges on three key factors: home prices, mortgage rates and household incomes. Lately, both home prices and mortgage rates have been on the rise.

Property prices are up 38.2% from the early 2012 market low, including a 5.6% gain over the past 12 months, as measured by the S&P CoreLogic Case-Shiller U.S. National Home Price Index. But prices have only recently returned to the lofty levels reached in mid-2006. The upshot: In many real estate markets, you’re paying the same prices paid by crazed buyers a decade ago.

Meanwhile, 30-year fixed-rate mortgages have lately been around 4.1%, versus a recent low of 3.4%. Still, mortgage rates remain low by historical standards, and that’s given a huge boost to affordability.

To understand why, consider the affordability index published by the National Association of Realtors. If the index is at 100, it means that a family earning the typical U.S. household income has just enough money coming in to qualify for the mortgage needed to buy the average-priced home, assuming they put down 20%. If the index is above 100, it means the typical family has more than enough income.

In 1999, before the housing bubble started inflating, the affordability index stood at 130.9. That indicated that the typical family had almost 31% more income than was needed to qualify for the mortgage required to buy the typical-priced home. By 2006, when real estate prices peaked, the index was down to 107.6. Fast forward six years, to the market trough year of 2012, and the affordability index had soared to 196.5.

Since then, affordability has declined. Still, as of December, the index stood at 162.8. That suggests homes remain extremely affordable, even compared to pre-bubble levels. A big reason: the fall in mortgage rates. In 1999, mortgage rates averaged 7.3%, well above current levels. Thinking of buying a home? There are many good reasons to continue renting—but rising property prices and higher mortgage rates aren’t among them.

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