Tuesday, December 13, 2011

Housing Affordability is Now at a Record High. Does That Counteract Any of the Stagnation Narrative?

The chart above shows the National Association of Realtors' monthly housing affordability index back to January of 1981 (data here).  The historical trend over the last 30 years is pretty striking for several reasons:

1. In the 1981-1982 period when the 30-year mortgage rate was peaking at record highs of 16-18%, the housing affordability index was about 65, meaning that the typical American family was only earning 65% of the income necessary to qualify for a 30-year mortgage to purchase a median-price home (with 20% down payment).

2. As interest rates fell through the 1980s, housing became more affordable and the index rose above 100 by the mid-1980s, and has remained above 100 since then. 

3. From the early 1990s through about 2005, the affordability index was pretty stable in the 120-140 range, until the housing bubble came along and inflated home prices, which lowered the affordability index down to 101 by July 2006. 

4. Over the last five years or so, the housing affordability index has nearly doubled to 197.8 in October of this year, reaching the highest level in the history of the index, and maybe the highest level ever? Amazingly, the typical American family in October had almost twice the amount of income necessary to purchase the median-priced home. 

What, if any, are the implications of housing affordability being at the highest level in history?  It's true that not everybody will benefit from this historic affordability, but many Americans will, especially first-time home buyers.  Here are some thoughts:

1. We keep hearing about stagnating income, rapacious income inequality, the disappearance or difficulties of the struggling middle-class, and how younger generations today will be worse off economically than their parents, how a household today needs to have both parents working full-time to survive financially, etc.

2. For CPI calculations, the BLS weights shelter as about one-third of consumer expenditures (32%), which is the category with the highest weight, and much higher than food (15%), clothing (3.6%), transportation (17%), medical care (6.6%), recreation (6.3%), and education (6.4%), etc.  

3. Given the facts that: a) housing/shelter is the greatest single expense for American households by far, and b) housing affordability is at an all-time historical high, doesn't that have to transfer into a huge increase in the standard of living for many Americans, especially younger, first-time, middle-class home buyers? 

For example, doesn't the fact that the typical household now has almost twice the income necessary to qualify to buy a median-priced home contradict the common narrative that it takes two adults working full-time today to support a household, whereas in the past it only took one full-time earner?  Making the two-earner case would have been much easier 30 years ago when housing affordability was below 100.  

Further, when a household's main monthly expense is now the most affordable in history, doesn't that translate into a huge increase in household purchasing power, even if wages are stagnant? Of course, one could argue that current homeowners don't necessarily benefit from record-high affordability, but there are still millions of young Americans who have been benefiting and will continue to benefit if affordability remains high.  

Bottom Line: Doesn't historically high housing affordability at least partially offset some of the narrative of stagnating income, the shrinking middle-class, and how younger generations today will be worse off economically than their parents, and how struggling household today needs to have both parents working full-time to survive financially, etc.? 

There may not have been any generation in history that has faced such incredibly affordable home ownership, especially when a young couple is buying a first home to get started in life, invest in a home, and raise a family.  At least in terms of housing affordability, young, middle-class Americans have never had it this good. 

Update 1: One of the most popular forms of mortgage financing for homes are FHA loans that are still being offered with only 3-5% down payments.  In markets like Las Vegas, FHA-financing represents 38.4% for all home purchase loans, so there does appear to be lots of financing available for first-time home buyers, with very low down payments, to take advantage of the record high affordability. 

Update 2: The chart below is from ADS Analytics and provides an alternative measure of housing affordability - the median mortgage payment as a share of income - which is at the lowest level (most affordable) level in the history of this series.  Therefore, the current median mortgage payment as a share of income, at about 14%, is less than half of the peaks close to 30% in 1988 and 2007, and maybe about 10% lower than what looks to be the historical average of about 24% (using an "eyeball" estimate).  This measure of housing affordability seems to support my case above, which is that the increased affordability of housing (for at least some Americans, especially first-time home buyers) has offset some of the income stagnation over the last several decades, as the lower housing costs act like an increase in household income.   


At 12/13/2011 11:22 AM, Blogger Matt McKnight said...

Some measures have shown sq ft. per person increasing. If there is a larger median home size...
then we are getting more for the money as well.

The counterpoint is that the median home price is brought down by homes in the wrong place. Of course, the market should correct for this eventually.

At 12/13/2011 11:25 AM, Blogger bix1951 said...

scream factor
when people lose they scream much louder than when they win

At 12/13/2011 11:30 AM, Blogger Bill said...

It seems that there has been a massive overcorrection with housing prices and that they are therefore poised for a pretty rapid rebound. The kindling is all laid out and we just need a spark to start the recovery.

At 12/13/2011 11:32 AM, Blogger morganovich said...

no, not really.

declines in home prices only matter to you if you don't own one. if you do, they destroy equity while depreciating your currency to buy a new one.

first time buyers are a bit thin on the ground just now.

declines in interest rates have not increased loan issuance (as new applications and mortgage origination remain stagnant).

further, CPI massively overstate owner equivalent rent (over 2/3 of housing CPI) relative to rents, which are trending up sharply, especially in major urban areas.

so no, i don't think this index means what you are purporting it to.

drops in home prices likely do far more economic harm than good. for every buyer who can take advantage, there are 10 people who just lost equity.

refis only matter if you can qualify, which few can, especially if they have low or negative equity.

all this drives rents up, which affect an increasing proportion of the population and tend to reset to market far more frequently.

i have real doubts the spike in this index is a net benefit. i suspect it's a net loss.

we're selling what, 5 million homes a year right now?

there are what, 140 million homes in the US?

if we use 100 as a home price, sure, 5 million people save 3% if price drops, but 140 million lose 3%. that looks like a loss of 420, 28X the gain to the new buyers.

refis are not going to keep pace with that and upward trending rents will offset it.

At 12/13/2011 11:43 AM, Blogger morganovich said...

"What, if any, are the implications of housing affordability being at the highest level in history?"

i think you may have the causality backwards here.

affordability is so high because so few can afford to move (negative equity or equity insufficient for a down-payment) and cannot qualify for loans due to higher standards.

generally, with rates on mortgages going down so much, you would expect demand for them to surge, especially if they are now so "affordable".

that fact that demand for them remains stagnant demonstrates that there must be some other issue at work.

i suspect that that issue is that too few have down payments or any real equity in their existing places to get loans and take advantage of the rates.

this is a helluva special in the VIP room, but the average folk are not getting to take advantage.

houses are "affordable" because so few can afford to sell theirs and/or qualify for a loan.

it's a constraint to demand and so long as it persists, no amount of price cutting is really going to help and may even make it worse by leaving would be buyers with less equity in their existing homes and lessened ability to qualify for a loan.

At 12/13/2011 11:49 AM, Blogger Benjamin Cole said...

Interesting commentary. The BLS CPI shows increasing housing costs for the last three years. That's the index some UFO-loonies say underestimates inflation.

I would like those screaming about hyper-inflation to explain how it is cheaper than ever to buy a house.

BTW, it is great time to invest in housing.

At 12/13/2011 12:06 PM, Blogger Thomas said...

Agree completely with morganovich.

Home equity was the driver for a long time. It's all gone. Bill: kindling? Perhaps housing is burning, not the housing market.

Housing is NOT an investment. Rising real estate prices simply reflect inflation; in the end there's nothing but an old house in need of repair or probably a tear-down given modern construction's appetite for the cheap.

Banks won't lend? Wrong. People won't borrow. Wise.

This generation of buyers is not the last one. Attitudes toward all of our "family values" and "work ethic" have changed. Attitudes about debt are improving. That's a negative for the housing market.

The current building craze is higher end Condo's and apartments in the city. Goodbye yard, station wagon and country club. Hello park, greenway, bicycle, moped, train.

Natural gas boom leads to more jobs until we have a glut of gas again. Then what?

At 12/13/2011 1:02 PM, Blogger morganovich said...

"I would like those screaming about hyper-inflation to explain how it is cheaper than ever to buy a house."


as you have already had this answered about a dozen times, i can only presume that either you are incapable of understanding the answer or have no medium or long term memory at all.

put simply:

declining prices only matter of you are not holding declining currency. homeowners are.

"affordability" takes such things as inflation into account already.

further, it only matters if you are able to take advantage of it. with combined sales and refi or about 11mm, that's what, 4% of americans?

that's why it cannot move the needle.

meanwhile, rents are up big, and the % of americans renting is up as well.

this has all been explained to you over and over. seriously, what is it with you and this incessant need to say the same dumb debunked stuff over and over?

it's pretty tiresome bunny.

At 12/13/2011 1:14 PM, Anonymous Anonymous said...

Another way to gauge affordability is to look at the median mortgage payment as a percentage of median income. While labor income is not doing that great, record-low rates means homes are at their most affordable in over 25 years (see chart).


ADS Analytics

At 12/13/2011 1:48 PM, Blogger rjs said...

almost all the gain was by the top 10%; the lowest 80% gained nothing:



At 12/13/2011 2:09 PM, Blogger morganovich said...


how are they generating that median?

no way did the median payment on all outstanding mortgages drop like that.

i suspect this is the median payment on newly issued mortgages, which makes it a very limited measure as it applies to about 3.5-4% of americans.

further, drops in price, as i said before, affect 25-30X more people, so "affordability" for a few, means "destruction of wealth" for most.

there really do not seem like good measures to try to apply generally.

they apply to far too few and leave out huge effects in terms of wealth destruction.

the low rates are being driven entirely by government subsidy. freddy and fannie are 90% of the market.

they are hemorrhaging money. that winds up coming back to taxpayers as a federal deficit, further reducing "affordability" by taking money form them elsewhere.

these metrics are much too simplistic to capture what is going on in a meaningful way.

your interpretations of them are not in accord with the facts. if homes are so "affordable" then why has demand not picked up?

if price drops that much, you would expect a big demand response, instead, nada. we are bumpiness along the bottom.

that means you must be missing something unless you believe that housing demand is not sensitive to price, a contention i doubt you could support.

At 12/13/2011 2:33 PM, Anonymous Anonymous said...


I kept my $400 monthly mortgage payment on a house I bought 24 years ago while everyone around me is strategically defaulting on their $1000-$2000 a month payment on underwater houses they bought in the last 10 years. Unless I am in a unique situation here, multiply that by a few hundred thousand mortgages and the median payment will drop very quickly.

At 12/13/2011 2:58 PM, Blogger morganovich said...


no, it wouldn't.

your payment in 2005 was the same as it is now.

if you are an average american, your income dropped.

thus, your payment as a % of income went UP, not down.

for payment relative to income to get cut in half in 4 years for the whole nation while income is going down is just flat out impossible.

the whole nation did not get to buy a cheap house and refi.

at most, 15% did, and of those, most took a hit on their old home.

think of it as a huge purchase of points if you like. you lose $100k in equity in your old house, sell it, buy a new one and sure, your payment is low, but you lost $100k on your old place, so that's a helluva hit.

sure, they may have a lower payment now, but, unless they are a first time buyer, they likely lost a ton of equity to get it.

losing $100k in equity to save 4 grand a year in interest is not too great a deal.

At 12/13/2011 6:06 PM, Blogger Hydra said...

if you are an average american, your income dropped.


Bad assumption.

The average income could drop substantially without affecting the average american.

Besides, the average american is most likely not a homeowner. that person is likely to be above average.

At 12/13/2011 6:13 PM, Blogger Hydra said...

Housing affordability depends on the median income, but that probably does not include those with no income. This is really the housing affordability for those that have a job index.

Even for those with a job, this is a bogus metric, because, as noted, it does not include the cost of taking a bath on your present house to buy a new one.

Rents have to go up because of more demand from those that lost homes, and to counteract the risk involved in renting where rules favor the tenant.

"the fact that demand for them remains stagnant demonstrates that there must be some other issue at work."

It seems to me morganovich is correct. The housing affordability index is an inomplete measure.

At 12/14/2011 9:47 AM, Blogger morganovich said...


your comments don't make any sense at all.

median income dropped. this is a straightforward fact. you are just trying to play silly games based on averages, but they are irrelevant.

"Besides, the average american is most likely not a homeowner. that person is likely to be above average."

uh, no. even now, after the drop, the homeownership rate in the US is 65-66%. that's basically 2 out of 3.

thus, the the average and the median american are homeowners.

you seem to be just making up facts.

At 12/14/2011 11:52 AM, Anonymous Anonymous said...

So, let's summarize the posts and current housing market. Houses are now affordable for the following people:

1) First-time home buyers
2) Employed people with an income that can support a house payment
3) People with a FICO score greater than 650
4) People with at least $5000 for a down payment and closing costs

How many people is this? How many houses are for sale? Did I just find out why house affordabilty is at a record high?


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