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Through the Roof

Mike Zaccardi  |  May 12, 2021

STOP LUSTING AFTER homes on Zillow. It’s time to get serious about the property market—and ask whether houses today are a good value.

Make no mistake: Real estate is red hot. Bloomberg recently reported that demand is so strong that almost half of U.S. homes sell within a week of coming to market. The S&P Case-Shiller U.S. National Home Price Index surged 12% over the 12 months through February, with the Phoenix and San Diego markets leading the way with 17% gains.

Rock-bottom mortgage rates are fueling this buying frenzy. Freddie Mac posts average 30-year and 15-year fixed rates each Thursday. The average 30-year mortgage is slightly below 3%, while the rate on a typical 15-year loan is 2.3%. With inflation forecast to be 2.5% over the next five years, buyers may be borrowing at less than the inflation rate.

Still, for first-time homebuyers, it’s easy to get frustrated as they watch prices go up and up. But the fact is, the data suggest homes remain a relative bargain.

Many folks believe housing affordability is simply the median price of a house compared to median income. But there’s more to it than that. The National Association of Realtors was kind enough to provide me with the full history for its housing affordability index (HAI), which goes back to 1989. The HAI measures how easily the typical family could qualify for a mortgage using these inputs:

  • The national median price for an existing single-family home.
  • Median family income, as reported by the Census Bureau.
  • The effective 30-year mortgage rate, which includes an amortized amount for upfront points and fees.
  • An assumed 20% down payment.

The question: If the typical family puts 25% of its income toward the mortgage payments on the typical home, how affordable is housing? When the index is at 100, the typical family has just enough income to cover the mortgage. A level above 100 means the typical family has more than enough income, so qualifying for a mortgage should be somewhat easier.

As of March, the index stood at 173.6. Affordability has improved from a year ago, when the index stood at 167.7. In March, the median existing single-family home price was up 18% from a year earlier and stood at $334,500. But household income has also been rising, though not quite as fast as home prices. Meanwhile, mortgage rates are lower than a year ago, but have been ticking higher in recent months.

Worried? Maybe we shouldn’t be. Historically, houses were far less affordable. During 1989 and 1990, the effective mortgage rate was above 10% and the HAI for 30-year fixed-rate mortgage borrowers bounced around 100, meaning homes were much less affordable than they are today.

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Through the 1990s, affordability improved, peaking at 139.8 in February 1999. From there, affordability gradually deteriorated again, culminating in the mid-2000s housing bubble. At its low point, in July 2006, the affordability index stood at just 100.5, a level not seen since 1989 and 1990. We all know what happened next: Home prices plummeted, while the Great Recession caused family income to stagnate and triggered a drop in mortgage rates.

The overall result: Housing affordability surged in 2008, then kept drifting higher as home prices continued to struggle. By far the best time to buy a home was late 2011 to early 2013. During some months in that stretch, the HAI was above 200.

Fast forward to today, and the HAI has averaged in the low 170s since June of last year. That may not be a bargain compared to 2011-13, but the U.S. housing market looks affordable compared to much of the past three decades.

Where do we go from here? There could be a trifecta of factors hurting affordability as the year progresses. We may see rising home prices and interest rates, coupled with slower income growth, as the impact of fiscal stimulus checks peter out. Still, for now, we probably shouldn’t be too alarmed by today’s red hot housing market.

Mike Zaccardi is an adjunct finance instructor at the University of North Florida, as well as an investment writer for financial advisors and investment firms. He’s a CFA® charterholder and Chartered Market Technician®, and has passed the coursework for the Certified Financial Planner program. Follow Mike on Twitter @MikeZaccardi, connect with him via LinkedIn, email him at MikeCZaccardi@gmail.com and check out his earlier articles.

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booch221
booch221
1 month ago

While somebody may be able to afford your overpriced home with a 3% mortgage they might not be able to afford it if interest rates jump to 4%. Rising interest rates could puncture this housing bubble.

The Drake
The Drake
1 month ago

The cost of the house is always key. Just because you can afford the monthly payment isn’t a reason to jump in. When the market tanks, and it always tanks, you find yourself owing more than it’s worth then you get transferred or have to sell for a different reason. That’s a recipe for disaster. Use some common sense and stop listening to financial “experts” telling you what you can afford.

Andrew Forsythe
Andrew Forsythe
1 month ago

Mike, very helpful article. I have a family member shopping for a first time home in the Austin area, which is likewise an insanely hot market. But your analysis, together with the very low mortgage interest rates, provides some comfort and perspective.

Thomas
Thomas
1 month ago

Really interesting analysis, thanks for writing it!

How much regional variability is there in the HAI? I imagine there are some areas of the country where the HAI is rising.

The HAI is based on the median family income. But not everyone has a family, and half the population has a below-median income. I’m worried that those at the bottom (or simply those that are young or single) are getting left behind.

Another consideration is that paying the mortgage is but one component of the cost of homeownership. A big, expensive house is going to have higher tax, insurance, and maintenance costs, and it’s also going to be more expensive to furnish, maintain the lawn, and keep updated. To determine how affordable a home is to the typical American, we would have to factor in all these additional variables.

Last edited 1 month ago by Thomas
Paula Karabelias
Paula Karabelias
1 month ago

My daughter , a young single professional is trying to buy her first home in a Boston suburb. The bidding wars are insane and some buyers are even waiving the home inspection. Since there isn’t a lot of new home building in Massachusetts, it seems supply with be tight for the foreseeable future . Not sure what others think, but I suggested she wait it out a bit until late summer /early fall when usually there are fewer buyers. I just can’t see paying 25% above asking price and kicking in more cash because the bank appraisal is coming in less than the purchase price.

parkslope
parkslope
1 month ago

My son is having the same problem here in Raleigh. Two houses he was interested in sold before the first day of scheduled showings.

Listings in the US are down 50% from last year and there are many qualified buyers. While prices may level off, I think a decrease is unlikely without a significant increase in mortgage rates.

Pravin Mittal
Pravin Mittal
1 month ago

Historically housing market (last 100 years) price rose little above the rate of inflation. There have been periods it has deviated but the market corrected itself over time.
https://www.multpl.com/case-shiller-home-price-index-inflation-adjusted.

I am not predicting that what will happen but useful to zoom out to look at historical perspective. Folks can find interesting data at
http://www.econ.yale.edu/~shiller/data.htm

Ben Rodriguez
Ben Rodriguez
1 month ago

Never heard of the housing affordability index. Great analysis. Low interest rates means lower monthly payments for most people. I think that explains a lot of the housing price increases.

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