Morning Report: House prices hit new highs. Are we in a bubble? 7/25/17

Vital Statistics:

Last Change
S&P Futures 2475.0 7.0
Eurostoxx Index 381.8 2.5
Oil (WTI) 47.2 0.9
US dollar index 86.4 -0.1
10 Year Govt Bond Yield 2.28%
Current Coupon Fannie Mae TBA 102.93
Current Coupon Ginnie Mae TBA 103.81
30 Year Fixed Rate Mortgage 3.95

Stocks are higher this morning as the Fed begins their 2 day FOMC meeting. Bonds and MBS are down.

House prices rose 0.4% MOM in May, according to the FHFA House Price Index. They are up 6.9% YOY. Home price appreciation is still red-hot on the West Coast, however some of the laggards (Midwest and East Coast) are starting to pick up steam. Meanwhile, the Case-Shiller Home Price Index rose .1% in May and is up 5.7% YOY. Why the difference? The FHFA House Price index only looks at homes with a conforming mortgage, which eliminates the distressed all-cash extremes on the low end, and jumbos on the high end. Certainly out here in the Northeast, the luxury end of the market (aside from trophy properties in the Hamptons and Manhattan) is deader than Elvis. Note that we have more than recouped the losses from the go-go days, at least according to the FHFA House Price Index.

FHFA House Price Index

I wanted to spend a little more time discussing housing affordability. If you look at the median house price to median income ratio, we are approaching the highs during the bubble years. We are currently at around 4.4x and historically, that number has been between 3.2 and 3.6x, meaning that house prices are stretched compared to incomes. It makes sense that house prices should be related to incomes in terms of measuring affordability, and also vulnerability do downdrafts.

Median House Price to Median Income Ratio

However is “median house price” the correct metric to use when determining affordability? It has one major flaw: it ignores interest rates. As car dealerships know, the sticker price is not the metric to sell a car: it is the monthly payment. Can’t afford a 30,000 car? Well, what if we go from a 6 year loan to an 8 year loan? Can you now afford that payment? Mortgages aren’t really that much different. So, to look at it from that angle, I plotted the typical mortgage payment (80 LTV conforming loan) on the median house and calculated what percentage of median income that payment turned out to be. And when you look at it that way, affordability it still pretty decent, at least compared to historical numbers. The reason why? Interest rates. For almost a decade, mortgage rates were double digits, and that equates to a much bigger payment for the same “median house.” It turns out that mortgage payments as a percentage of income are much lower than what they historically have been.

mortgage payment as a percent of income

Now, the one complicating factor is the mortgage interest deduction, which makes housing in the 80s look less affordable than it really was. Taxes were higher, and interest as a percentage of the P&I payment was higher, so the differences are somewhat exaggerated. However, it does appear that buying a house is not as “unaffordable” as the median house price to median income ratio implies. Just remember these graphs when you hear people discussing how high real estate prices are and that we are in another bubble. We aren’t.

25 Responses

  1. Lots of consternation from the left over Trump and the Boy Scouts. Lots of breathless chatter about Literally Hitler making his own Nuremburg. I think the left is shocked that obama is unpopular with the Boy Scouts. He never addressed the Jamboree during his presidency. I guess the BSA isn’t woke enough.


    • He never addressed the Jamboree during his presidency.

      That’s not entirely true. He never went in person, but he made a video to celebrate the BSA’s 100th anniversary. In fact, it’s not uncommon for sitting presidents to not address the Jamboree in person. It’s only happened 14 times (twice by video–GWB and Obama) since 1937.

      Feel free to channel your dislike of him in other directions.



    The full transcript of the President’s speech to the Boy Scouts of America is included in the link.


    • Liberal media bias in action right here:

      As the Scout law says, a scout is trustworthy, loyal — we could use some more loyalty I will tell that you that.

      Crowd Chanting. The crowd was finishing the Scout oath, ffs.


      • I heard the speech and heard the oath being completed – said it along with the boys. Missed the idea that the shorthand “crowd chanting” was editorializing, but you are probably correct, because it could ony have cost one word to write “Crowd chanting Oath” or two words for “Crowd chanting entire oath.”

        I thought the speech was wholly inappropriate. You?

        Liked by 1 person

        • Crowd chanting goes along with the “Trump attempting to indoctrinate our youth like Hitler” narrative they are trying to create.

          I agree he shouldn’t have been political, but at least he addressed them. obama wouldn’t, because the BSA isn’t woke enough and he was terrified of what the gay lobby would say.


        • There was this:

          Also 2005 GWB:


        • @markinaustin: ““Crowd chanting entire oath.””

          Or, better yet, it could have been the normal word used (and what I feel confident would have been used had it been Obama there, along with editorials disappointed that he didn’t take a stand on allowing transgendered boy scouts): reciting.

          When an individual or a group is speaking an oath or pledge, they are “reciting”. You don’t ask the assembly to stand up and “chant” the pledge of allegiance.

          I can’t decide who I dislike more. Trump or his critics. Sometimes I think his critics, because I don’t think Trump is capable of knowing better. He’s a force of nature. Like a hurricane. He shouldn’t be president, IMO. Just like a hurricane should not. I don’t think he’ll destroy the country, but I have questions about his competency and serious, serious, major objections aesthetically to his general approach to the office.

          I think a lot of his critics should know better. I don’t think Trump does, or is capable of it. A journalist knows the right word.

          Regarding the rest of his speech, he’s such a frickin’ narcissist, it’s awful. I don’t think he’s going to ruin the country, because I think a bowl of pudding could probably execute the powers of the presidency and America would still run. The federal bureaucracy is huge and the economy is broadly driven by individuals going to work and starting businesses and inventing products and so on, and they don’t get their marching orders from the PoTUS.

          Liked by 1 person

        • I approve. “Recite” trumps “chant”.

          Do we have an approve button, or only an “unapprove”? And what kind of word is “unapprove”, anyway? Does it negate the “like” button?

          Liked by 1 person

        • John McCain just gave the most eloquent speech about the Senate to the Senate that I have ever heard, and the best speech I have heard from anyone in a very long time.

          C-Span followed it by cutting to remarks by President Trump.

          Text here:

          Liked by 1 person

        • Trump was giving a press conference with a Head of State, they always do that.


  3. The left thinks parents don’t have any rights with respect to their children

    These are the steps. The first is to recognise that children do not belong to their parents. Second, when a claim is made that parents have rights over their children, it is important to step back and examine the language used. We need to remind ourselves that parents do not have rights regarding their children, they only have duties, the principal duty being to act in their children’s best interests.

    Liked by 1 person

    • “The first is to recognise that children do not belong to their parents.”

      As long as I’m paying for them, they absolutely do belong to me. 100%.

      When they go get a job and can pay their own bills, they’ve purchased their manumission. Not until. I don’t care if their fourteen or forty. I’m paying your bills, you’re basically an indentured servant if I want you to be, and only live your own life or do anything I don’t specifically ask you to do with my blessing and indulgence.

      “We need to remind ourselves that parents do not have rights regarding their children, they only have duties”

      That’s literally insane. I realize this isn’t a #brexit issue, but there have to be folks in the UK who don’t live in metropolitan London who thinks these positions are literally insane, and whatever seems to go against these lunatics is what they support. We have no rights regarding our offspring?

      It’s exactly 3/4ths of an inch to “you also have no right regarding yourself”.


      • The first is to recognise that children do not belong to their parents.

        Has a real fascist feel. I’m reminded of Il Duce:

        “All within the state, nothing outside the state, nothing against the state.”

        Liked by 1 person

      • The lawyer in me says the relationship changes over time and by situation. We can restrict the freedom of our minor children for their benefit, and when it causes no serious harm to them, for our own. We cannot sell them, and we are responsible to our minor children for support – guidance, affection, food, clothing, health care and education, and shelter.

        Got an adult child in the home? Then its your way or the highway. Not so simple with a minor.

        Still, if your 15 year old is a disruptive drunk/addict who will not accept treatment, saying bye-bye can be the only action that saves yourself and your child.

        My 3 girls caused very few heartaches. My son was a raging drunk from his junior year in HS and I had to exclude him from the house middle of his senior year. Fortunately, Six weeks later, he called me and asked if he could enter treatment. He had hit the proverbial bottom. He has been sober ever since, and still attends AA regularly.

        I often wonder if I could have closed the doors on one of the girls. My son was 6′ and a solid 195# and was not likely gonna be raped and sold for his body. Glad I never had to make that choice.

        Liked by 1 person

    • You have rights and duties. Duties come with rights. Rights come with duties. Or they certainly frickin’ should. When the government is assigning your duties and removing your rights, you’re in big forkin’ trouble.


    • Somehow child welfare morphed into overruling entirely appropriate decisions.

      Liked by 1 person

  4. Brent,

    “which eliminates the distressed all-cash extremes on the low end, and jumbos on the high end”

    Is that a good idea? Does that give us a better picture of the market, eliminating distressed properties and jumbos? I guess it makes sense. There’s no particular indication of risk or bubbly-ness from the distressed and jumbo market?


    • Real estate indices are tough… Houses aren’t homogeneous (like, say a share of Apple stock), so they tend to use a repeat sale methodology (where they look at the last two sales of the same house). When it is distressed / foreclosure etc, it will sell at a discount to where it would if it was not a foreclosure. The FHFA index eliminates these. Also, the very high end tends to be volatile, and since there are fewer transactions, a couple oddball ones can throw things off.

      Liked by 1 person

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