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Wait, Home Buying Is the Cheapest It’s Been in 20 Years?


If you happen to be in the market to buy a home, you’re probably not giddy with delight over today’s sky-high listing prices.

After all, home prices continue to inch higher and higher from their near-term lows seen about a decade ago after surging for years.

Knowing the home seller purchased the property for 50% less than what they’re attempting to unload it for today, even though they bought it just five years ago, may also be hard to swallow.

But what if I told you consumer house-buying power might reach its highest point in nearly 20 years if mortgage rates simply dip from around 3.8% to 3.7%.

Forget the Home’s Price Tag, Consider the Affordability

  • It’s not enough to look at listing prices over time
  • You have to consider wage growth and interest rate movement
  • This allows you to see real home prices adjusted for inflation
  • To determine if they’re a good deal or not

First American, a large title insurance company, measures affordability using its Real House Price Index, or RHPI.

It relies upon changes in income and interest rates to determine consumer house-buying power.

Simply put, when average household income rises and/or mortgage interest rates fall, consumer house-buying power increases.

Unadjusted home prices (the listing price you actually see) play a role as well, but you can’t just take the price at face value and look at it in a vacuum.

One has to consider what those dollars are actually worth today once you factor in what you’re making and how much it costs to borrow from the bank.

For example, if a home used to cost $500,000 when you were making $75,000 a year in salary, and now costs $600,000, but you’re making $125,000 per year, the equation changes significantly.

Same goes for mortgage rates – if they’re a point lower today than they were six months ago, you can’t look at home prices exactly the same.

I should also note that the RHPI isn’t dependent on the typical assumptions of home price affordability, such as down payment, LTV, and DTI.

But obviously these things matter because it is often down payment that is a stumbling block for prospective home buyers.

However, there is an abundance of low down payment mortgage options available to consumers today, including the FHA’s 3.5% down payment loan program, and Fannie and Freddie’s 97% LTV loan programs.

So while the monthly payment may be more expensive when putting less down, the purchasing power should more than make up for it thanks to increased wages and lower interest rates.

Real House Prices Keep Getting Cheaper

  • Real home prices have fallen month-to-month and year-over-year
  • Thanks to lower mortgage rates and increasing household incomes
  • Home prices are even cheaper than they were back in 2012
  • Mortgage rates were lower then but affordability was worse due to lower wages at the time

First American noted that real house prices (those adjusted for income and interest rates) fell 0.7% between April 2019 and May 2019, and declined 3.7% from a year earlier.

Meanwhile, consumer house-buying power increased 1.3% between April and May, and is up 9.3% year-over-year.

Even better, home prices when adjusted for house-buying power remain a whopping 41.1% below their 2006 peak.

And are even 17% less expensive than they were in January 2000.

If mortgage rates fall slightly more than they already have recently, from 3.8% to the expected level of 3.7% in the third quarter of 2019, consumer-house buying power would be the highest in the history of the First American series, which dates to the year 2000.

It would also be 13.3% higher than it was in July 2018, when the 30-year fixed mortgage averaged a much higher 4.5%.

Purchasing power is already higher than it was when mortgage rates reached record lows back in 2012. The reason was lagging incomes at the time, which have now caught up.

In terms of what someone could reasonably afford, assuming a 5% down payment and July 2019 average household income of $65,800, a prospective home buyer could purchase a $414,000 property.

Despite improvements in affordability nationally, RHPIs have gone up the most year-over-year in Providence, RI (+2.2%), Milwaukee (+1.1%), Columbus, Ohio (+0.7%), Detroit (+0.7%), and Las Vegas (+0.1%).

But they’ve fallen the most year-over-year in San Jose, CA (-13.9%), Seattle (-9.4%), San Francisco (-7.8%), Portland, OR (-7.7%), and Riverside, CA (-7%).

The moral of the story is don’t be discouraged by the purchase price. Consider what you’re making today and what the monthly housing payment is when factoring in the lower mortgage rate.

You may even need to adjust your purchase price higher to reflect these changes. A mortgage pre-approval can provide you with this maximum number as well.

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