by Calculated Risk on 6/29/2022 10:00:00 AM

Today, in the Calculated Risk Real Estate Newsletter: Worst Housing Affordability" since 1991 excluding Bubble

Excerpt:

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 and 2022), 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):

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. And excluding the bubble - with all the “affordability products” - this is the worst affordability since 1989.

Look down to the second graph below (real house prices) and look what happened after 1989. It took more than a decade to return to 1989 prices in real terms.

Also, in April, the average 30-year mortgage rates were around 5.2%, and currently mortgage rates are close to 6.0% - so we already know the “Affordability Price Index” will increase further over the next couple of months (meaning houses are even less affordable).

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