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