# Worst Housing Affordability" since 1991 excluding Bubble

### Real House Prices and Price-to-Rent Ratio in March

### Calculated Risk Affordability Index

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 1991**.

Look down to the second graph below (real house prices) and look what happened after 1991. House prices were mostly down or flat for the next 5 years in real terms.

Also, in March, the average 30-year mortgage rates were around 4.2%, and currently mortgage rates are close to 5.4% - so we already know **the “Affordability Price Index” will increase further over the next couple of months (meaning houses are even less affordable)**.

### Real House Prices and Price-to-Rent Ratio in March

It has been over 16 years since the bubble peak. In the Case-Shiller release yesterday, the seasonally adjusted National Index (SA), was reported as being 60% above the bubble peak in 2006. **However, in real terms, the National index (SA) is about 14% above the bubble peak **(and historically there has been an upward slope to real house prices). The composite 20, in real terms, is about 6% above the bubble peak.

People usually graph nominal house prices, but it is also important to look at prices in real terms (inflation adjusted). As an example, if a house price was $200,000 in January 2000, the price would be over $329,000 today adjusted for inflation (64.5%). That is why the second graph below is important - this shows "real" prices (adjusted for inflation).

**Nominal House Prices**

The first graph shows the monthly Case-Shiller National Index SA, and the monthly Case-Shiller Composite 20 SA (through March) in nominal terms as reported.

In nominal terms, the Case-Shiller National index (SA) and the Case-Shiller Composite 20 index (SA) are both at new all times highs (above the bubble peak). The National Index is 60% above the bubble peak, and the Composite 20 index is 48% above the bubble peak.

**Real House Prices**

The second graph shows the same two indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices. In real terms, the National index is 14.3% above the bubble peak, and the Composite 20 index is 5.7% above the bubble peak in early 2006.

In real terms, house prices are now above the previous peak levels. There is an upward slope to real house prices, and it has been 16 years since the previous peak, but real prices appear historically high (Of course interest rates had been very low).

**Price-to-Rent Ratio**

In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS.

Note that OER is lagging behind other measures of recent rent increases.

Here is a similar graph using the Case-Shiller National and Composite 20 House Price Indexes. This graph shows the price to rent ratio (January 2000 = 1.0). The price-to-rent ratio had been moving more sideways but picked up significantly recently.

On a price-to-rent basis, the Case-Shiller National index is at a record high, and the Composite 20 index is back to November 2005 levels.

**By all of the above measures, house prices appear elevated.**