housing

One of the most interesting things in finance right now is the Real Estate market. Home prices may have bottomed, but no one is selling. It’s really not a market. Why? Affordability is awful. Worse than the housing bubble.

In this graph, I take home prices since 1988. Each year I change the average price of a home by Case-Schiller national index. I use average wages each year to calculate the real income you need to afford the average home. This way you can compare income across time. Here’s what you get.

That is not a typo. Housing right now is even more unaffordable than during the housing bubble. In fact, over the last 35 years, housing has never been LESS affordable.

The question is where do we go from here. It’s hard to say. Rates are high so people are locked in. Hybrid work makes it less likely you need to move for a new job. My guess is nominal prices changes will be less than inflation for the next few years to get affordability up, but until we get more volume it’s hard to say how things get back to normal.

Or we could be going to the Europe model where homeownership is a luxury, not a dream.

While we have been focused on things like oil, used car prices, etc. perhaps the biggest price increase over the last 12 months has been in housing. While home prices are up 20%, that truly understates the price increase to buyers.

In this graph, I show the year-over-year change in the payment for the average priced home. There are two pieces that drive the change: 1) home prices themselves and 2) mortgage rates.

When the pandemic started, housing prices increased but the decreased mortgage rates made housing actually cheaper on a monthly payment basis compared to pre-COVID.

However, now payments are up over 50% year-over-year as mortgage rates touch 5% and home prices are up 20% year over-year.

This large increase will certainly have an impact on demand, especially institutional demand which has been almost 1/2 of purchases in a lot of markets.