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House-Buying Power at Near-Historic Levels
July 12, 2018 | Curtis Johnson
We keep hearing that home affordability is approaching crisis levels. While this may be true in a few metros across the country, housing affordability is not a challenge in the clear majority of the country. In their most recentReal House Price Index,First Americanreported that consumer “house-buying power” is at “near-historic levels.” Their index is based on three components:
Median Household Income
Mortgage Interest Rates
The report explains:
“Changing incomes and interest rates either increase or decrease consumer house-buying power or affordability. When incomes rise and/or mortgage rates fall, consumer house-buying power increases.”
Combining these three crucial pieces of the home purchasing process, First Americancreated an index delineating the actual home-buying power that consumers have had dating back to 1991. Here is a graph comparing First American’s consumer house-buying power (blue area) to the actual median home price that year from the National Association of Realtors (yellow line). Consumer house-buyer power has been greater than the actual price of a home since 1991. And, the spread is larger over the last decade.
Even though home prices are increasing rapidly and are now close to the values last seen a decade ago, the actual affordability of a home is much better now. As Chief EconomistMark Fleming explains in the report:
“Though unadjusted house prices have risen to record highs, consumer house-buying power stands at near-historic levels, as well, signaling that real house prices are not even close to their historical peak.”