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Wednesday, March 30, 2022

Real House Prices, Price-to-Rent Ratio and Price-to-Median Income in January and a look at "Affordability"

by Calculated Risk on 3/30/2022 11:04:00 AM

Today, in the Calculated Risk Real Estate Newsletter: Real House Prices, Price-to-Rent Ratio and Price-to-Median Income in January


I’ve put together my own affordability index - since 1976 - that is similar to the FirstAm approach (more of a house price index adjusted by mortgage rates and the median household income).

I used median income from the Census Bureau (estimated 2021), assumed a 15% down payment, and used a 2% estimate for property taxes, insurance and maintenance. This is probably low for high property tax states like New Jersey and Texas, and too high for lower property tax states. If we were including condos, we’d also include HOA fees too (this is excluded).

For house prices, I used the Case-Shiller National Index, Seasonally Adjusted (SA). Also, for the down payment - there wasn’t a significant difference between 15% and 20%. For mortgage rates, I used the Freddie Mac PMMS (30-year fixed rates).

So here is what the index looks like (lower is more affordable like the FirstAm index):

Case-Shiller MoM House Prices
Note that by this index, during the early ‘80s, homes were very unaffordable due to the very high mortgage rates. During the housing bubble, houses were also less affordable using 30-year mortgage rates, however, during the bubble, there were many “affordability products” that allowed borrowers to be qualified at the teaser rate (usually around 1%) that made houses seem more affordable.

In general, this would suggest houses are the least affordable since the housing bubble. This says nothing about if “now is a good time to buy” (see the bottom of my post Housing: A Look at "Affordability" Indexes).

Also, in January, the average 30-year mortgage rates were around 3.45%, and currently mortgage rates are close to 4.9% - so we already know the “Affordability Price Index” will increase sharply over the next couple of months (meaning houses are even less affordable).
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