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Home affordability has been the talk of the town for a while and it inspired me to get a feel for the forest in a domain largely cluttered with political opinion instead of scientific method. My objective was to distill the relevant data as much as possible, but no more than that.
The first thing that came to mind was inflation-adjusted home prices. Robert Shiller’s CPI adjusted methods are my favorite and offer the largest view of the forest. The data I downloaded from multpl.com is monthly back to 1987, then quarterly to 1952, then annually to 1890. I did the math to extend it to Sept 2025. I added dates where significant changes in the trace occurred. There are no economic events implied by these date selections.
Shiller CPI Adjusted Home Price Index
The values on the vertical axis are only the output of the calculation and change depending on the reference CPI date chosen. The utility of this plot lies in visually selecting a date and referencing the inflation adjusted median US home prices relative to that date. Shiller’s plot adds building costs, population growth and 10-year interest rates in an attempt to provide context to home price movement. Interestingly, the low correlation proves there’s much more to the pricing picture.
Shiller Home Price Index with Contributors
It’s beyond my ability and interest to explain housing prices—my interest is housing affordability. What stands out to me is the consistency in home pricing vs. purchasing power from WWII until 1997. The periods before and after have been Mr. Toad’s wild ride. We need more information to form a reasoned opinion of the goal—to see what has happened to home affordability.
The actual ability to buy a home not only depends on pricing—but income, mortgage interest rates, the percentage of that income available to service mortgage payments, and non-mortgage home ownership expenses.
That’s for Part II of this post.
(Graph is high-resolution and should be viewed full screen. You can download it.)
It would be interesting to see if there’s any correlation between the rise in mortgage-backed securities (MBS) and declining housing affordability in one of your lovely graphs. I think there’s a connection. When banks started securitizing mortgages and selling them off to Wall Street instead of holding the risk themselves, it changed the lending landscape. Banks became more willing to approve larger individual loans since they weren’t stuck with the risk anymore. That shift likely pushed up property prices by increasing what buyers could borrow, without any corresponding increase in housing supply.
The rise of MBS is entirely the fault of the FASB which establishes GAAP rules for reporting by businesses. Prior to the Savings and Loan crisis of the early 1980’s S&Ls could originate and retain on their books loans for personal home mortgages. They were allowed to retain these assets and value them at their amortized value. Then, the FASB decided that they must value them at market value reflecting changes in value due to changes in interest rates. Instantly one third of S&Ls were insolvent. And, they could no longer hold these long term loans on their books. The FNMA was then created to buy these loans from the originators allowing them to be re-marketed as MBS. England, Canada and other countries avoid this problem by not financing 30 year home loans.
When we bought our first house in 1970 we needed 20% down and mortgage interest rates were 9-1/2% That meant we could buy very little which meant only what used to be called a very basic starter home.
I wonder if the demand for more, bigger and better and the ability to put little even nothing down is a driver of higher prices.
If prices keep going up it means somebody is paying those higher prices.
Yesterday I helped one of the girls whose wedding dress I’m buying move into her first home. The mortgage term is 35 years!
I am not sure that a national view of this topic will be that helpful. Regional differences are so huge that trying to think about affordability in San Francisco and Omaha at the same time is impossible.
This is the National Assoc. of Realtors latest metro area home affordability data. I don’t know the math behind it, but I’m sure it’s reasonably accurate.
Definitely correct from a personal perspective, but my little quest here is big-picture and drilling down to the regional would require additional variables. I’m over my head as it is, but I still think the overall real data is interesting. Especially so when income and interest rates come into the picture—which is coming up next. Reverse engineering the math to generate my own plots also provides insight into the data (Shiller’s thoughts) that I wouldn’t have had otherwise.
I don’t think that there are many people who think that there is not an affordability problem.
Warren Buffett on a contributor to the 2008 housing bubble:
“With housing it’s something even more dramatic than that, because most people aspire to own their own home. If you really think that house prices are going to go up next year and the year after, you feel if I don’t buy it this year, I’m going to have to buy it next year. That’s not true of an Internet stock. But it’s true of a home.”
Having bought his home in 1958 Mr. Buffett appears to believe the holding period for a home and investments are the same length – forever.
Same with his partner in crime, Charlie Munger. He was the real estate guy and they both hated it from an investment perspective. Charlie, a real estate attorney, rented for about 30-years and then owned a modest home in Los Angeles for about 70-years. Interestingly, Munger was all-in for family home ownership but thought single folks should be indifferent about it.
In December 2023 I bought and read Poor Charlie’s Almanac which I enjoyed, learned from and recommend.