Compare these two headlines:

Case-Shiller Home Price Index Ends 2011 With New Lows (February 28, 2012) *

Home Affordability Index Hits Record High (March 7, 2011) **

Throughout the housing crisis, the headlines have focused on the precipitous fall of prices and the resulting plight of homeowners who are underwater.

There is no doubt that the crisis has taken a huge financial and emotional toll on millions of families as the home price index has continued to decline – but it has also created opportunities for many first-time homebuyers, and for the investors who take the financial risk to restore distressed properties and make them available to buyers as the affordability index has risen.

In our September 2010 post Want to know when prices will rise? Ask the government!, we talked about the graph below and how government intervention to make homes more affordable inevitably has the opposite effect.

History of Home Values - The New York Times
Comparing the rocket trajectory on the right of the graph to home values of the previous 110 years kind of puts the recent bubble into perspective. Instead of decrying plunging prices for the past five years, why haven’t we seen the following headline?

Absurdly Inflated Home Prices Get Reality Check, Prices Return to Sanity

In the past few years, the government has intervened through foreclosure moratoriums and refinancing programs in an attempt to keep home prices high rather than make them more affordable. This has not been effective, and many markets have corrected anyway – back to pre-bubble values that are in line with what people can actually afford using sensible long-term financing.

Will prices eventually make their way up to mid-2000’s peaks? Yes, over a very long time, but not really – the increase will have far more to do with the declining value of the dollar (i.e. inflation), then the actual increase in the value of housing.

Perhaps that’s a good thing. Relatively affordable housing leaves more money to spend on other things. Our children’s education, vacations, saving for retirement, etc. We understand why government wants home prices to rise – it increases tax revenues. It’s good for bankers too – higher prices equal bigger fees. But how exactly does it make a homeowner richer except on paper? Sure they can cash out if they sell, but won’t they still need a place to live?

I doubt our grandparents had the degree of fascination with home prices that we do. By and large once they purchased a home, they stayed put and paid off their mortgage around the time they were ready to retire – making that transition far easier. Baby boomers nearing retirement today have record levels of mortgage debt, and I fear that transition will not go well for them, or for our economy.

What do you think? Which is more important – high home prices or high home affordability?

*Case-Shiller Home Price Index. Designed to measure changes in the total value of all existing single-family housing stock through a complex methodology.

**NAR Housing Affordability Index.  Measures the current median income against the income required to qualify to buy a median-priced single-family home using conventional financing. (Financing with 20 percent down and monthly payments at 25 percent of the gross income.)

6 thoughts on “Head to Head: Home Price Index vs. Housing Affordability Index

  1. Hey Mike,

    The link to that great post that everybody should read is not working.

    As for the rest of the post — out here in Vegas — I’ll take High Home Affordability ANY DAY OF THE WEEK.

    In 2008 when gas prices were this high, Las Vegas was looking like a Ghost Town. Today is a completely different story. I’m sure that has a lot to do with the Average Mortgage Payment being FAR LESS today then it was in 2008.

    High Home Prices are only good for homeowners who are going to sell and move somewhere cheaper to retire. That’s about it… Give me the positive cash flow any month of the year.

    Another Great Post utilizing common sense.


  2. It’d be nice if home prices could fall back down to Earth without any interference, but where would we be then?

    Government intervention has been necessary to keep Fannie and Freddie afloat, along with banks and many large corporations.

    I don’t know if an outright freefall would have done us any better.

    It’s disconcerting regardless, and clear that home prices are inflated as a result.

    Still, you have to assume that those who have kept up with payments throughout all the carnage will continue to do so, even if they’re deeply underwater.

    So getting in at today’s prices at today’s rates doesn’t sound all that bad.

  3. Great perspective on housing expectations in general! Who ever promised we would get rich because we owned a home? As a real estate agent, I want to help people buy and sell a home that they will call home, one that will be an asset to the community. Which means they have to have money left over for educating their kids, improving their home, going on vacation and retiring someday! Sheesh – how did we ever deviate from that formula, anyway?

  4. Pingback: San Diego Foreclosure Update

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