FairEconomist_IHB
New member
One of the problems with price/income and price/rental measures of affordability is that interest rates have a real and substantial affect on how affordable a given house price is. If interest rates were roughly constant over time, with only cyclical effects, perhaps this wouldn't be a big deal, but interest rates have dropped drastically over the past 25 years and bond markets forecast rates will remain very low for the indefinite future.
<p></p>
So, I downloaded interest rates over the past 25 years from www.hsh.com and got Irvine house prices and incomes from IrvineRenter (thanks!) I calculated payments for the median house price each year and expressed it as a fraction of income. I then normalized it to a reference year (1983) similar to how IR did it in <a href="http://www.irvinehousingblog.com/2008/01/13/house-price-to-income/">this post</a>. I couldn't use 1981, like he did, because my mortgage data only went back to 1983. Here's the result:
<p></p><img src="http://www.smugmug.com/photos/244681720-O.jpg" border="0" alt="Irvine Normalized House Payment/Income Ratio" >
<p></p>
edit: Thank you, effenheimer, for hosting!
<p></p>
Various comments:
<p></p>
First, the chart is very different than IR's price chart. Mid-00's prices come out substantially less affordable than anything in the historical record, but it's not a night-and-day difference. The 90's are almost as strikingly low as the mid-00's are high. FWIW, this feels right to me. It wasn't as bad in 1990 as in 2005 but it was still pretty bad in 1990. 2005 is not more than twice as bad.
<p>
Second, payment ratios seem to fall faster than house prices. House prices fell for 7 years running in the 90's but the payment ratio pretty much finished its fall in 4. Further price declines resulted from increasing interest rates pushing down the affordable price. I suspect, based on this, that the crash to affordable levels will happen relatively quickly, probably ending by 2010. However, prices will probably remain at low levels for some time after that, since the situation will be the same as in the '90s. Interest rates will be very low, and the Fed will have to raise them as the economy recovers. This will keep house prices from rising by driving up payments.
<p>
Third, I think this is a good way to measure affordability. The payment ratio lolled about for some time in a relatively narrow range in the 90's. During this time there were both psychological and economic reasons to expect minimal price gains over the medium term, so these result from purchasing decisions with a conservative expectation for appreciation. "Affordable" seems to be in a normalized range of 0.7 to 0.8, or 0.39 to 0.45 in absolute terms. In this estimate, currently the affordable median house price should be about $360,000 to $410,000 with current incomes.
<p></p>
So, I downloaded interest rates over the past 25 years from www.hsh.com and got Irvine house prices and incomes from IrvineRenter (thanks!) I calculated payments for the median house price each year and expressed it as a fraction of income. I then normalized it to a reference year (1983) similar to how IR did it in <a href="http://www.irvinehousingblog.com/2008/01/13/house-price-to-income/">this post</a>. I couldn't use 1981, like he did, because my mortgage data only went back to 1983. Here's the result:
<p></p><img src="http://www.smugmug.com/photos/244681720-O.jpg" border="0" alt="Irvine Normalized House Payment/Income Ratio" >
<p></p>
edit: Thank you, effenheimer, for hosting!
<p></p>
Various comments:
<p></p>
First, the chart is very different than IR's price chart. Mid-00's prices come out substantially less affordable than anything in the historical record, but it's not a night-and-day difference. The 90's are almost as strikingly low as the mid-00's are high. FWIW, this feels right to me. It wasn't as bad in 1990 as in 2005 but it was still pretty bad in 1990. 2005 is not more than twice as bad.
<p>
Second, payment ratios seem to fall faster than house prices. House prices fell for 7 years running in the 90's but the payment ratio pretty much finished its fall in 4. Further price declines resulted from increasing interest rates pushing down the affordable price. I suspect, based on this, that the crash to affordable levels will happen relatively quickly, probably ending by 2010. However, prices will probably remain at low levels for some time after that, since the situation will be the same as in the '90s. Interest rates will be very low, and the Fed will have to raise them as the economy recovers. This will keep house prices from rising by driving up payments.
<p>
Third, I think this is a good way to measure affordability. The payment ratio lolled about for some time in a relatively narrow range in the 90's. During this time there were both psychological and economic reasons to expect minimal price gains over the medium term, so these result from purchasing decisions with a conservative expectation for appreciation. "Affordable" seems to be in a normalized range of 0.7 to 0.8, or 0.39 to 0.45 in absolute terms. In this estimate, currently the affordable median house price should be about $360,000 to $410,000 with current incomes.
