Through the Roof

Mike Zaccardi

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.

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 and check out his earlier articles.

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