On Monday, we got the fourth month of home affordability data coming in below trend, which is a strong confirmation that the housing market is once again in a bubble. (The NAR index is published with a two-month delay, so the latest numbers are for July).
The affordability index measures the household income needed to qualify for a traditional mortgage on a median-priced single family home. So it’s looking at a mortgage with a 20 percent down payment and a monthly payment below 25 percent of income at the currently effective rate on conventional mortgages…
The index has been dropping rapidly since peaking in January at 210.7. We’re now down to 157.8, according to the preliminary numbers released for July on Monday. Home prices have been rising and interest rates climbing, while wages haven’t kept up. That’s how we got to the lowest level of affordability seen since July of 2009.
According to the NAR, this shouldn’t be dire news. A score of 157.8 officially indicates that a household earning the median income has 57.8 percent more income than needed to get a mortgage on a median priced home.
A few interesting things to note here:
1. There is some debate about whether this index has predictive power. In other words, it isn’t necessarily easy to identify when there might be a housing bubble.
2. This adds more evidence that a housing recovery in the US is a long-term project. Housing prices may have risen so much by the mid-2000s that it will take years to sort it all out. A slow-growth economy doesn’t help.
3. Instapundit has a good take: “I WISH IT WOULD GET TO MY NEIGHBORHOOD.” While the idea of a bubble could be troubling, there are plenty of homeowners who would welcome some increased value for their home. Of course, that increased value might disappear again…
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