Housing is Still Much More Affordable Than a Decade Ago

Home prices continued to rise nationally in August, up 0.9% from July, in the latest Home Price Index and HPI Forecast from CoreLogic, a global information and analytics firm, putting prices up 6.9% from the year before. But does that mean house prices are becoming unaffordable?  I keep hearing this common theme from buyers – that houses are just getting too expensive.  But are we/they truly looking at this from a proper perspective?  The First American Real House Price Index (RHPI) reported that "while affordability is lower than a year ago, it remains high by historic standards." The RHPI is 38.4% below its housing boom peak of July 2006.  
What does that mean?  House prices are typically reported nominally. In other words, without adjusting for any inflation. Just like other goods and services, the price of a house today is not directly comparable to the price of that same house 30 years ago because of the long-run influence of inflation in the economy. The RHPI helps provide an alternative view of the change over time of house prices in different markets across the country. The three key drivers of the First American Real House Price Index (RHPI) are incomes, mortgage rates and an unadjusted house price index. Incomes and mortgage rates are used to inflate or deflate unadjusted house prices in order to better reflect consumers' purchasing power and capture the true cost of housing.  So when interest rates are low and overall employment/income is improving, higher prices don’t necessarily mean less affordability.  According to CoreLogic, wage growth is outpacing home price growth in about half of all local markets so far this year.  And we know how low rates continue to be.  So when those things are considered, higher housing prices don’t necessarily mean that they are too expensive.
Bottom line – when our current buyers complain about how high the prices of housing has gotten, we can remind them that from an affordability standpoint, we are actually still in a great position.  For more information on this, go to http://www.firstam.com/economics/real-house-price-index/.  It is very interesting.

After about a month and a half of pressure to move rates higher, we may actually be moving back into a better scenario – let’s just hope the activity of the last couple of days continues.