Earlier this week, CNBC reported “Yep, it's another housing bubble,” based on the latest numbers from the National Association of REALTORS® (NAR) home price affordability index, which is published with a two-month delay so the latest numbers are from July.
“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 report states.
True, the latest reading of the home price affordability index – which measures the household income needed to qualify for a traditional mortgage for a median-priced single-family home - marked the lowest level of affordability since July 2009.
And yes, when mortgage rates begin to inch up from historic lows and home prices start to regain a bit of strength, affordability will drop.
On average, NAR reports home prices have surged 13.4 percent compared to a year ago, and mortgage rates are at their highest averages since February 2012. Wages are rising — but not as fast as home prices.
As a result, NAR’s affordability index peaked in January at 210.7 and has been falling ever since. It’s now at 157.8.
So here’s where it all begins to get a bit hazy.
An affordability reading above 100 indicates that median income is higher than needed to qualify for a mortgage, and CNBC reports that 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.
However, citing a recent paper by three economists from Robert Morris University in Pennsylvania, which suggests that the index can be used to detect housing bubbles, CNBC shows how Adora Holstein, Brian O'Roark, and Min Lu track the index against its long-term trend line. When the index falls below trend, it marks a possible start of a housing bubble. They suggest that when the monthly affordability index value falls below trend for at least three months, a housing bubble probably exists.
In response, NAR experts show why housing affordability could likely strengthen in the coming months “as prices have decreased from a month ago and most likely reached their seasonal peak for the year. Even with rates increasing, certain metro areas have healthy inventory levels, and consumers can still look to purchase before those historically low rates are a thing of the past.”
So the bottom line here is that when interest rates rise (which we all know is inevitable) they must be accompanied by wage increases to keep affordability high, otherwise prices will fall.
Like the “big” bubble period leading up to 2006, this summer’s real estate market has been hot, with multiple offers and selling prices higher than asking prices. Where prices are headed this fall and winter is anyone’s guess, but it’s a good bet that interest rates and wages will keep them in check for a bit.
CNBC even hedged their own declaration with “marking a possible beginning of a housing bubble” in the lead paragraph of their report.
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