Wednesday, March 16, 2011

Housing Affordability Reaches All-Time High in Jan.

Rising prices for oil, gas and food are making those items less affordable these days, but housing is a different story - there's probably never been a time when it's been more affordable than today.  Data from the National Association of Realtors show that its composite Housing Affordability Index reached an historical high of 191 in January of this year.  Thanks mostly to falling home prices, a family with the median income of $61,533 had almost twice (191%) the income needed ($32,208) to qualify for a 30-year, fixed-rate mortgage at 4.82% to purchase the median priced single-family home in January ($159,400), assuming a 20% down payment.    

Here's one way to see how affordable housing is today: In 2008, the monthly payment on the median-priced home then of $196,600, financed at the prevailing mortgage rate then of 6.15% with a 20% down payment would have been $958.19.  For today's median-priced home financed at 4.82% the monthly payment would be 30% less, at only $670.60.  Especially for first-time home buyers, housing has never been more affordable, and those $200-300 monthly savings compared to payments in 2008 will more than offset rising gas and food prices.  

Record-high housing affordability just doesn't seem consistent with the inflationary pressures that many seem concerned about, does it?  For example, the inflationary periods in the late 1970s and early 1980s were periods of rising home prices (double-digit increases for 11 consecutive quarters in the late 1970s) and rising mortgage rates (reaching 18.5% in 1981), and we've got almost just the opposite today. Rising and record-high housing affordability seems more consistent with deflation than inflation?


At 3/16/2011 1:44 PM, Blogger Benjamin Cole said...

Excellent post by Dr. Perry.

Some ding-dongs (such as Richard Fisher, Dallas Fed) have the screaming-meemies about inflation, but the latest CPI reading of 220 is all but unchanged from 219 in August--and that is August of 2008! Check it out on the BLS website if you don't believe it.

Fisher should join the board at the Bank of Japan, where his style of a weak, dithering monetary policy is appreciated.

Real estate needs reflating, bigtime. Small businesses borrow against collateral--that means real estate, in 90 percent of cases. No collateral--no loan, dude. Bernanke, please print money until the property markets are humming again.

Bernanke is being a bit too timid and cautious, as is shown by this post. Housing is cheaper than a 55-year-old hooker.

We need to put America back to work. Screw Libya, screw Iraq, screw Afghanistan. Let's rebuild the USA.

At 3/16/2011 1:54 PM, Blogger morganovich said...

dr perry-

but isn't a great deal of the "affordability" derived from heavy subsidization of the 30 year loans which you seem to argue against?

you seem to oppose them in principle, but then favor the results they produce here.

price those loans in a market where F+F are not buying 80-90% of loans, and this index might look quite different.

the other flip side of this issue is that this only matters if you are not already in an upside down mortgage.

for the roughly 25% of US mortgage-holders with negative equity, housing looks anything but affordable. many could not move if they wanted to.

At 3/16/2011 2:50 PM, Blogger Junkyard_hawg1985 said...

Dr Perry,

I'm glad to see the housing affordability index getting better. This is a good sign. I don't arrive at the same conclusion about inflation though. There are three components to housing affordability (median income, home prices and mortgage rates). The problem with having mortgage rates in the equation is that when inflation starts, it will be a positive feedback mechanism. Measured inflation will increase interest rates which in turn increases measured inflation which in turn increases interest rates.

Since the BLS uses owner equivalent rents, interest rates do indirectly affect the measured inflation rate. The first action the fed will take to stop inflation will be to raise interest rates. This will in turn increase owner equivalent rents.

Right now, the Fed is intervening monetarily to keep interest rates low (low Fed Funds Rate, Bond purchases in QE2, and QE1 Mortgage Backed Security purchases). Much like a country that subsidizes food prices (i.e. Egypt or India), they can only affort this for so long until they have to pay the price.

At 3/16/2011 2:51 PM, Blogger TomFoolery said...

Why "Data" From Trade Groups is NOT to Be Trusted: National Association of Realtors Edition

At 3/16/2011 2:51 PM, Blogger morganovich said...


comparing home payments to average wages says nothing about inflation.

wages are just another price and increase with inflation as well.

if home prices went up 9% and wages went up 10%, that would increase affordability (to a worker) but there would still be very significant inflation and you'd sure notice it if you were on a fixed income or had significant savings.

At 3/16/2011 3:34 PM, Blogger Junkyard_hawg1985 said...

"comparing home payments to average wages says nothing about inflation."

Well Said!

At 3/16/2011 4:17 PM, Blogger PeakTrader said...

Yes, houses are much more affordable.

However, given job growth has lagged population growth, more Americans are unemployed and it's harder to find a job now than in the past three years.

If someone buys a house with a fixed mortgage, the monthly payments stay the same, while nominal income (or wages) will increase and the house will appreciate over time.

At 3/17/2011 8:36 AM, Blogger morganovich said...

this is also a little bit of a false comparison.

rates are low, but loans are VERY difficult to get right now. it's a bit like saying that prices on PC's are low, but the stores don't have any.

if you can't get the loan, what good is it's low rate to you? one could even argue that the low rates are causing this problem. if they rose, it might make sense to lend to more people.

meanwhile, 25% of mortgages in the US have negative equity.

i wonder how affordable the market seems to those folks?

At 3/17/2011 9:05 PM, Blogger Hydra said...

Morganovich is right. Rates are low but loans hard to get. I got a good rate on a no cash out refi, but the bank ran me through the paper mill for a month. Previous loan, from the same bank, took 15 minutes on the phone.

Go figure.

At 3/17/2011 9:05 PM, Blogger Hydra said...

This comment has been removed by the author.


Post a Comment

<< Home