Nobody From Nowhere (@i8dc)

Occasional Common Sense

Housing is the Most Affordable It’s Been in at Least 25 Years

with 3 comments

The Case-Shiller Home Price Index is the most commonly used indicator of home prices.  The latest chart of the index data is below, showing the 10-city average that goes back to 1987 and the 20-city average that goes back to 2000.  They’re both indices, with the beginning of 2000 set to equal 100, so a reading of 150 means that housing prices are about 50% higher than they were in January of 2000.

Case-Shiller Home Price Index Data

For the rest of this piece, I’m going to use only the 10-city index because it goes back farther.  At some point I’ll do this with the CoreLogic data that goes back to the early 1970s.

Case-Shiller is generally misused.  It’s an index of housing prices, but price, cost, and affordability are very different things.  For most people, housing cost is a function of the home price and the mortgage loan terms. As we all know, interest rates are at historical lows – below’s the 30-year mortgage rate from Freddie Mac.

Freddie Mac National Average 30-year Mortgage Rate

Using this data, along with Freddie Mac’s data on points, I’ve created an index in the chart below of the cost of buying a home, in terms of the monthly payment.  Both are set to 100 on January 1, 2000.

Housing Cost Index Based on Case-Shiller 10-City Data

This index shows that that monthly payment of a newly purchased home is lower today than at any time since 1999.  But this isn’t the end of the story, because cost isn’t the same as affordability.  Over time, incomes rise; a $1000 mortgage payment is more affordable at today’s median income than at 1999’s.  Below is a chart of home affordability against Case-Shiller.

Home Affordability Index v. Case-Shiller Index

The affordability index is the monthly mortgage payment derived from Case-Shiller and Freddie Mac average mortgage data divided by the annual U.S. Census median household income.  Income data’s not available for 2010 and 2011, so I’ve assumed this is unchanged since 2009.

Based on this analysis, purchasing a home today is more affordable than it’s been at any time since the Case-Shiller index started in 1987.

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Written by David Clayton

September 4, 2011 at 10:21 am

Posted in Debunkery

3 Responses

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  1. This analysis contains a serious error. You are confusing nominal mortgage rates with real mortgage rates. At any time, mortgage rates contain both a real and an inflation component. The real component is the actual cost of borrowing money. The inflation component is a measure of expected future inflation. Of course, both components affect monthly payments. However, to the extent that interest rates reflect expected inflation, they are offset by expected increases in home prices (and/or expected increases in future income).

    Stated differently, the 6+% fall in mortgage rates substantially overstates the actual (real) fall in the cost of borrowing. For a better measure take a look at TIPS rates over time. They have fallen by 2-3% over time.

    See “Real Mortgage Rate is Not So Nice” (http://econompicdata.blogspot.com/2008/12/real-mortgage-rate-is-not-so-nice.html) for someone making this point with actual data.

    peterschaeffer

    September 8, 2011 at 10:22 pm

    • Good idea. Though I suspect that adding this data won’t change the result, though it will reduce the magnitude. I also didn’t compare purchasing against renting, which would be a useful addition.

      David Clayton

      September 20, 2011 at 11:29 pm

      • “Good idea. Though I suspect that adding this data won’t change the result”

        Actually, I think it will. Mortgage rates haven’t fallen that much in real terms. Follow the link above or use the TIPS data.

        Peter Schaeffer

        September 22, 2011 at 4:31 pm


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