Housing affordability: at or near worst this millennium


– by a New Deal Democrat

NAR calculates a monthly “housing affordability index” that estimates the average mortgage payment for an existing median-priced home based on an estimate of median household income. For June, which came in at 98.5:

Not only has affordability deteriorated sharply this year, but June’s reading was the lowest in over 20 years, ie. even worse than at the top of the housing bubble:

[note above graph stops in May].
From time to time, I looked at other measures of housing affordability, calculating separately for down payments and monthly mortgage payments, for different housing indexes, and using more recent data on average hourly wages. I last did it in April and May. With the NAR hitting a new 20-year record low in June, let’s take another updated look.

The first chart below compares 4 measures of home prices: the FHFA Purchase Index (blue), the Case Shiller National Index (red), the Census Bureau’s measure of median new home prices (gold), and the measure of NAR for median prices for existing homes (last year only) (purple). The best way to arrive at “real” inflation-adjusted housing costs would be to divide by median household income, but since this is only calculated once a year, a good monthly proxy is the median hourly wage I use below. All four measures are normalized to 100 as of January 2006, at or near the peak of the housing bubble for all of them:

Although the data is compressed, all 4 exceeded their bubble peaks as of May (latest FHFA (up 8.9% from January 2006) and Case Shiller (up 1.7%)). For existing homes this continued in June (up 6.5%), while for new homes there was a slight decline (down -1.7% compared to an increase of 9.1% in May).
The Census Bureau also publishes quarterly updates on all home prices, and in the second quarter of this year, home prices deflated by average hourly wages rose 7.2% from their bubble peak:

The story remains a bit different with mortgage rates. In 2006, they reached 6.8% in July. In contrast, the latest weekly update pegged the 30-year fixed-rate mortgage at 5.22% (highest since 2009); at their recent peak in late June, the rate was 5.81%:

Since “real” home prices are on average about 5% higher than they were at their peak in 2006, let’s compare a $250,000 mortgage then and a $262,500 mortgage now at prevailing mortgage rates. Here’s the monthly payment for each:
April 2006: $1,865.
July 2006: $1,913.
June 2022: $1,840
August 2022 $1,742.
The bottom line is that the average monthly mortgage payment at its peak in June was just over 95% in real, wage-adjusted terms of what it was at the height of the bubble. As of last week, it was still over 90%.
When I last looked at this in April, I wrote that: “I don’t expect prices and mortgage rates to continue to rise together as they did until the peak of the bubble [because lending was completely reckless then]…. So if mortgage rates go up, I would expect sales to fall, followed by a fairly quick succession of prices.”
We’ve seen new home prices fall. We haven’t seen this yet for existing homes, because while *new* inventory is increasing to levels just below 2019 levels (red, right scale), *total* inventory (blue, left scale) remains well below its Level 2019 and 2020:

But I still expect the turn to come very soon.
Let me finish by updating one of my favorite housing charts, comparing the year-over-year change in mortgage rates (inverted, *10 for scale) to the year-over-year change in home permits and starts:

The year-over-year change in mortgage rates this year was matched only by the change since 1994. In response, in 1995, housing permits were down -10% year-over-year and 15% from peak to trough. But as of June of this year, permits were still slightly *higher* on a year-over-year basis.
In an update in May, I wrote about the 10% decline in new housing that “The question, of course, is the 10% year-over-year decline from where. From a recent high of 1.9 million, a low of 1.6 million last summer, or somewhere in between? If the decline is 15% like in 1994, that will put us back to 1.7 million permits…I suspect it will be worse. And that will almost certainly have enough of an impact on the economy next year to put us close to, if not in, recession all by itself.
And in the June and July reports for May and June, permits were indeed just under 1.7 million both times.
As the chart below shows, permits in the third quarter of last year averaged just under 1.7 million units year over year:

A 10% drop from that would be around 1.5 million units year-on-year.
Home permits and starts will be reported tomorrow July. Then we will see if there has been any further deterioration.

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