Morning Report: Home prices continue to rise

Vital Statistics:

  Last Change
S&P futures 3361 36.6
Oil (WTI) 36.91 -0.24
10 year government bond yield   0.67%
30 year fixed rate mortgage   2.92%

Stocks are higher this morning as a bunch of mergers are announced. Bonds and MBS are flat.

The September FOMC meeting begins this week. No changes are expected in the Fed Funds rate. We will get a new set of economic projections and dot plot. That could potentially be market-moving.

There are 19 million high quality refinance candidates, representing 43% of all 30 year mortgages. Black Knight defines “high quality” as a FICO > 720, 20%+ equity, current on the mortgage, and could save 75 basis points on their mortgage. “With rates near historic lows, millions of consumers have an opportunity to find savings by refinancing and, in many cases, significantly lowering their interest rate and monthly payments,” said Will Pendleton, senior managing director of third party originations at Home Point Financial. “We feel that the low-rate environment is likely to persist well into 2021, and a great amount of focus in the lending community is on building capacity to meet the explosion of consumer demand.”

Note that 19 million mortgages at $250k a pop works out to be about $5 trillion in originations… So this has a few years to run.

Home prices are up 13%, according to Redfin. “Home price growth this high is making the housing market especially difficult for first-time homebuyers right now,” said Redfin chief economist Daryl Fairweather. “Rising prices are just one more reason for people to leave expensive urban neighborhoods behind. The sudden rise of remote work has allowed homebuyers who are priced out of one neighborhood to expand their search to more affordable areas. In turn, they are pushing up home prices in those relatively affordable areas, causing more people to look to even more affordable areas, and so on. Price growth may slow in 2021, but even if it does, high prices are going to continue to make affordability a concern for buyers.”

This image has an empty alt attribute; its file name is redfin-home-prices.jpg

Morning Report: Mortgage purchase applications the highest in a decade

Vital Statistics:

 

Last Change
S&P futures 3282 -5.25
Oil (WTI) 58.13 0.04
10 year government bond yield 1.79%
30 year fixed rate mortgage 3.87%

 

Stocks are lower this morning as China and the US sign a Phase I deal on trade. Bonds and MBS are up.

 

Note we will have some Fed-speak later this morning.

 

Trump characterized his Phase I deal with China as a “big, beautiful monster” and encouraged farmers to buy bigger tractors. China is agreeing to purchase an additional $200 billion of US goods over the next two years, which represents about half of the US trade deficit. Energy, agricultural, and industrial exports are all set to increase, while the US will cancel new tariffs on cellphones and laptops. Some other tariffs will be reduced while others will remain in place.

 

Mortgage applications increased 30% last week as purchases rose 16% and refis rose 43%. This was the first week after the holidays, so there is probably are some weird adjustments playing out. Rates fell 4 basis points to 3.87%. Most notably, purchase activity increased 8% from a year ago and is at the highest level since October 2009.  A few homebuilders specifically mentioned on their earnings calls that they are seeing no season slowdown this year. At any rate, the Spring selling season is just around the corner. Note that while we are at a 10 year high on the purchase index, we are still well below bubble levels

 

MBA purchase index

 

Inflation at the wholesale level remains below the Fed’s target, with the headline producer price index up 0.1% MOM and 1.3% YOY. Ex-food and energy, it rose 0.1% and 1.1%. While the producer price index is not the preferred inflation index for the Fed, it confirms we are still not seeing much in the way of inflationary pressures.

 

 

Morning Report: Fannie / Freddie sale by 2022?

Vital Statistics:

 

Last Change
S&P futures 3088 -6.25
Oil (WTI) 57.59 0.44
10 year government bond yield 1.83%
30 year fixed rate mortgage 4.00%

 

Stocks are lower this morning on weak overseas economic data. Bonds and MBS are up.

 

Initial Jobless Claims rose to 225k last week. We are still at extremely low levels historically. Jerome Powell will be testifying today at 10:00 am. Nothing earth-shattering came out of his testimony yesterday, although he pushed back on Trump’s suggestion that the Fed should cut rates below zero.

 

Inflation at the wholesale level came in a little hotter than expected, with the Producer Price Index rising 0.4%% MOM and 1.1% YOY. Ex-food and energy, it rose 0.3% MOM and 1.6% YOY. These readings are still well below what the Fed would like to see, which is inflation at 2%.

 

Mark Calabria said that Fannie and Fred could be ready to exit government conservatorship by 2022. “If all goes well, 2021, 2022 we will see very large public offerings from these companies,” Calabria said at an event sponsored by the American Association of Residential Mortgage Regulators and the Conference of State Bank Supervisors. “The consent decree will be able to give that window where they can go to market, do an offering and still operate under a way where we’ve got some prudential safeguards.” Fannie and Fred stock fell on the news. Fannie’s stock has been a trader’s dream, with plenty of volatility to play with.

 

FNMA chart

Morning Report: Personal Incomes rise

Vital Statistics:

 

Last Change
S&P futures 2989 8.25
Oil (WTI) 55.35 -1.24
10 year government bond yield 1.70%
30 year fixed rate mortgage 3.95%

 

Stocks are up this morning on no real news. Bonds and MBS are down.

 

Personal incomes rose 0.4% in August, while personal consumption rose 0.1%. Income surprised to the upside, while spending disappointed. Inflation remains within the Fed’s target, with the core PCE index rising 0.1% MOM and 1.8% YOY. The headline PCE, which includes food and energy, was flat MOM and up 1.4% YOY. Wages and salaries were up 0.6% MOM and up 4.8% YOY. Given that inflation is running below 2%, we are seeing real wage growth.

 

Durable goods orders rose as well, increasing 0.2%, while the Street was looking for a decrease of 1%. Ex-transportation they were up 0.5%, again above expectations. Business capital expenditures disappointed, however falling 0.2%.

 

Pending home sales rose 1.6% in August, according to NAR. “It is very encouraging that buyers are responding to exceptionally low interest rates,” said Lawrence Yun, NAR chief economist. “The notable sales slump in the West region over recent years appears to be over. Rising demand will reaccelerate home price appreciation in the absence of more supply.” The Western region was up 8% YOY as falling mortgage rates are improving affordability.

 

Millennials are continuing to leave the big cities, as they head to the suburbs to raise families (and also get priced out). New York City lost almost 38,000 young adults last year, which was twice the decline it had seen in the previous few years. When the Millennials were younger, urban walkable environments were all the rage and many in the industry thought this time was different. It wasn’t. The Millennial generation is getting married later and having kids later, but it seems like they are going for the same thing every generation prior to them wanted: space, good schools, etc. This is good news for the builders at the lower price points. Take a look at PulteGroup’s chart below.

 

pulte

 

The IPO market is still broken. Peloton was the most recent IPO to break price on the open. “Break Price” means to trade below the IPO price. It opened around $27 versus an IPO price of $29. This won’t help We Work’s IPO which is looking like an absolute dumpster fire as the price keeps getting cut. Historically, IPOs would trade at substantial premiums to their offering price, but those days are over. This represents the change in who pays the bills for investment banks, from the buy side to issuers.

Morning Report: Blowout ADP jobs report

Vital Statistics:

 

Last Change
S&P futures 2945.83 2.3
Eurostoxx index 390.26 -0.72
Oil (WTI) 63.37 -0.27
10 year government bond yield 2.50%
30 year fixed rate mortgage 4.18%

 

Stocks are higher as we await the FOMC decision. Bonds and MBS are up. Markets should be quiet this morning as most of Europe is closed for May Day.

 

Today’s Fed decision is set to be released at 2:00 pm. No changes in policy are expected and it should be a nonevent.

 

Pending Home Sales rose 3.8% in March, according to NAR. Activity increased pretty much everywhere except for the Northeast. Falling mortgage rates have helped boost activity and we are seeing a bit of an improvement in the inventory balance. Pending home sales reached a level of about 5 million, which is the same level as we saw in 2000. We have 50 million more people since then, which means there is a lot of pent-up demand.

 

The ADP jobs report came in at an increase of 275,000 jobs in April. This was well above the Street expectation of 180,000 for Friday’s jobs report. Professional and business services led the charge, and we also saw an increase in construction employment. The service sector added 223,000 jobs, the biggest increase in two years. With the Fed out of the way, 2019 could be better economically than people were thinking. Note that Trump is still jawboning the Fed to cut rates.

 

ADP report

 

Mortgage Applications fell for the fourth straight week, dropping 4.3%. Purchases fell 4% and refis fell 5%. “Mortgage rates were lower last week, with the 30-year fixed rate declining to 4.42 percent, as concerns over global growth, particularly in Germany, outweighed more positive domestic news on first quarter GDP growth and business investment,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Applications to refinance and purchase a home both fell, but purchase activity still remained slightly above year ago levels. The drop in refinances were driven by fewer FHA and VA loan applications, which typically lag the movement of conventional loans.”

 

Freddie Mac bumped up its origination forecast for 2019 by 4% to $1.74 trillion as rates have fallen. They expect the 30 year fixed rate mortgage to be 4.3% at the end of the year, and home price appreciation to moderate to 3.5%.

Morning Report: Inflation-adjusted land prices still below bubble levels

Vital Statistics:

Last Change
S&P futures 2889 -9
Eurostoxx index 376.86 -2.5
Oil (WTI) 68.97 -0.89
10 year government bond yield 2.88%
30 year fixed rate mortgage 4.56%

Stocks are lower this morning on overseas weakness. Bonds and MBS are up.

Yesterday was a bit of a milestone as the 1 month T-bill briefly cracked the 2% level. Farewell, zero bound.

Tropical Storm Gordon is hitting the Gulf Coast. Oil prices have softened as the storm looks to be weaker than expected. We can still expect to see flooding issues and servicers should be prepared for an uptick in delinquencies. Things to know about your insurance if you are in the storm’s path.

Not much in the way of data today, but we have a lot of Fed-speak.

Emerging markets are getting slammed as a combination of central bank tightening, trade woes, and currency issues are pushing the asset class down. The flight to quality trade should support bond prices and help push yields lower.

Like Freddie Kreuger, government shutdown threats just keep returning. Congressional Republicans are looking to wrap up funding by October 1. Controversial issues like funding the wall would likely get pushed until after the election. As far as shutdowns go, the markets generally do not care, but originators need to remember that things like tax transcripts were unavailable the last time we shut down.

Mortgage applications fell 0.1% last week as purchases increased 1% and refis fell 1%. Rates increased about 2 basis points.

Same store sales rose 6.5%, yet another indication that the back-to-school shopping season was strong. As goes BTS, so goes the holiday season, meaning growth in Q4 should be strong. Note the Atlanta Fed raised their Q3 GDP estimate to 4.7%. Consumption is 70% of GDP.

Wells is out with a call for a 3.2% 10-year yield by the end of the year. A combination of higher deficits, lower trade deficits, and the expiration of a tax provision will lower demand in the face of rising supply. With strong spending bolstering the economy and a tight labor market, the Fed may try and squeeze in an extra rate hike to provide more breathing room in case the economy rolls over.

The September Fed Funds futures are at 99% chance of a rate hike, and the Dec futures are at a 70% chance of another.

Single-family lot prices reached a record level last year, however if you adjust for inflation, they are below the peak. Note however that lot sizes have been falling, and I don’t think this analysis corrects for that. For example, the typical lot size in the Northeast is 0.4 acres, and the typical price is $128k, which amounts to $320k an acre. On the Left Coast, the average lot size is .15 acres and the average price is $84k, which works out to be $560k an acre. Even if you correct for the declining lot size, we still aren’t back to peak levels in inflation-adjusted land prices. Builders constantly mention that land availability is a constraint on building, but this analysis shows that things were worse during the bubble years.

Nominee Kavanaugh

From Jonathan Adler at Volokh:

 

Judge Kavanaugh has served on the D.C. Circuit for twelve years. This court is often referred to as the “second-highest” court in the land because it hears the lion’s share of legal challenges to major federal regulations. Administrative law is a heavy part of the court’s docket, and forms a large part of Judge Kavanaugh’s record. In his time on the D.C. Circuit, Judge Kavanaugh has written over 200 opinions, over 100 of which concern administrative law.

Prior to serving on the D.C. Circuit, Judge Kavanaugh was a partner at Kirkland & Ellis, worked in the Bush White House, and for Independent Counsel Kenneth Starr. He clerked for Anthony Kennedy, as well as for two circuit court judges. There is no question about his qualifications for this nomination.

Attention will now turn to Judge Kavanaugh’s judicial opinions and other writings. Aaron Nielson has a summary of Judge Kavanaugh’s concurrences and dissents at the Notice & Comment blog. Going beyond Kavanaugh’s opinions, here are some other writings. Here’s a lecture Judge Kavanaugh gave at CWRU on the D.C. Circuit at the Case Western Reserve University School of Law. A published version of the lecture is here. Here is Minnesota Law Review article on the separation powers and here is Harvard Law Review piece on statutory interpretation.

Here are some additional thoughts on the Kavanaugh nomination:

  • Judge Kavanaugh is widely respected on the Supreme Court. Many of his clerks go on to clerk at One First Street. More importantly, his opinions attract notice from the justices. Several of his dissents have been vindicated by subsequent Supreme Court decisions. His dissents showed the way for the Court in Michigan v. EPA (White Stallion Energy Center v. EPA concerning mercury emissions), UARG v. EPA (CRR v. EPA concerning GHG emissions), Free Enterprise Fund v. PCAOB (concerning separation of powers), and D.C. v. Wesby (concerning qualified immunity). And even when certiorari was granted, Judge Kavanaugh’s dissents have been noted in subsequent Supreme Court cases (as in Lexmark International v. Static Control Components which favorably cited Kavanaugh’s dissent in Grocery Manufacturers Association v. EPA). This suggests other justices will take the new junior justice’s opinions quite seriously, especially on administrative law.
  • Judge Kavanaugh takes administrative law very seriously, and he makes agencies do their homework. As much as any other judge on the D.C. Circuit, he makes sure that agencies act within the scope of the authority they have been delegated by Congress, that they follow the procedures required by the APA, and that the adequately justify their decisions. This has often led to decisions invalidating agency action — both in challenges brought by supporters and opponents of regulation — but Judge Kavanaugh is not an anti-regulatory zealot. Where agencies play by the rules, he has upheld their actions against legal challenge, even where the actions in question may seem unreasonable or unfair (as when he rejected challenges to surface coal mining regulations).
  • Judge Kavanaugh shares the Chief Justice’s belief that there is a “major questions” exception to Chevron deference. In the challenge to the FCC’s “net neutrality” rule, Judge Kavanaugh echoed the Chief Justice’s admonition that courts should not lightly presume that Congress has delegated agencies broad regulatory authority if Congress never actually said so in the underlying statutory provisions.
  • Judge Kavanaugh takes separation of powers seriously, as can be seen in his dissenting opinions arguing that the structure of the Public Company Accounting Oversight Board (PCAOB) and the Consumer Financial Protection Bureau (CFPB) are unconstitutional. The former of these opinions was subsequently vindicated by the Supreme Court.
  • Like his former boss, Justice Kennedy, Judge Kavanaugh has a broad understanding of the freedom of speech protected by the First Amendment, including commercial speech. This is most noticeable from his separate opinion concurring in the judgment in American Meat Institute v. USDA. In this opinion, he showed a sophisticated understanding of how to reconcile various cases concerning commercial speech regulation and compelled commercial speech (an understanding better than that of the court’s majority, as I noted here).
  • Judge Kavanaugh’s views of executive power may depart from those of Justice Kennedy. Whereas Justice Kennedy voted with the Court’s liberals in support of habeas petitions filed by enemy combatants in the Boumediene case, Judge Kavanaugh has interpreted this precedent quite narrowly, and may be unlikely to follow his former justice’s lead. On the other hand, Justice Kennedy was himself highly supportive of executive power in many national security and foreign affairs cases, voting in support of Presidential power in cases such as Hamdi v. Rumsfeld, Trump v. Hawaii, and Zivotofsky v. Kerry.
  • Judge Kavanaugh will be criticized for prior statements he has made about Presidential immunity. In the Minnesota Law Review article linked above, he suggested that a sitting President should not be subject to litigation or criminal investigation. Note, however, that this was his opinion in 2009. More importantly, he did not suggest Clinton v. Jones was wrongly decided and said explicitly that any such insulation from litigation or investigation would have to be enacted by Congress, and could not be imposed by the Courts. Many early news reports on the nomination obscure or fail to mention this fact.
  • Judge Kavanaugh’s extensive record has created an extensive paper trail. There will be lots of documents for the Senate Judiciary Committee to review — and it’s certain that Senate Democrats will seek to slow things down on that basis. On the other hand, insofar as Senate Democrats have already announced their opposition to the nomination — some even before the nomination was announced — it’s not clear why they would need more time to review the record. After all, they don’t need more time to review materials if they’ve already made up their minds.

======================================================================

I think this is a fair assessment of his writings and decisions and different from the spin the media has put on it from their various political as opposed to judicial or legal analyses.  I did read a [basically non-political] opinion of his that I found to be totally off the point of the case, and that would be the basis of my questioning of him.  There was no reason for a guy as smart as he is to miss the point of the whole litigation.  Maybe his clerk wrote his opinion, but I would want to make sure I knew he wasn’t throwing in a spanner for some personal reason.  If y’all are interested I will dig up the case.

And no, my questioning him on his politics would be limited or non-existent.  If he satisfied me on how he freaking missed the point on a simple case I would vote for him.

 

Morning Report: Tax reform week 9/25/17

Vital Statistics:

Last Change
S&P Futures 2496.8 -2.8
Eurostoxx Index 383.9 0.7
Oil (WTI) 51.2 0.5
US dollar index 85.8 0.3
10 Year Govt Bond Yield 2.25%
Current Coupon Fannie Mae TBA 103.24
Current Coupon Ginnie Mae TBA 104.21
30 Year Fixed Rate Mortgage 3.85

Stocks are down small this morning on no real news. Bonds and MBS are flat.

We have a decent amount of economic data this week, along with a lot of Fed-speak. The big economic news will be the final revision to second quarter GDP and the personal income and personal spending releases. Janet Yellen speaks on Tuesday.

Economic activity slowed in August, according the Chicago Fed National Activity Index. The index fell from 0.4 to -.31, for the lowest reading in a year. Production-related indicators drove the decrease. Employment-related indicators were a mild positive.

The Trump Administration is going to push for tax reform this week. The highlight is a cut in the top rate to 35% and a cut in the corporate income tax to 20%. The cut in the top rate will be paid for in part by limiting deductions for state and local taxes. Chuck Schumer has insisted that “not one penny” of tax cuts go to the top 1%, so that could make the plan doomed. The estate tax will also get the axe. Republicans are working on the procedures to pass this without Democratic votes.

Meanwhile, Obamacare repeal and replace looks like it is going to go down as well.

We are starting to see some of the fallout from the recent hurricanes: Homebuilder D.R. Horton cut its cash flow forecast by 50%. Lennar has also said that the hurricanes will delay deliveries. At the end of the day, there is such high demand for homes that this should be a 1 quarter effect which will be made up in following quarters.

Lenders are easing standards given the increase in interest rates and the corresponding drop in volume. “Lenders further eased home mortgage credit standards during the third quarter, continuing a trend that started in late 2016. In particular, both the net share of lenders reporting easing on GSE-eligible loans for the prior three months and the share expecting to ease standards on those loans over the next three months increased to survey highs,” said Doug Duncan, senior vice president and chief economist at Fannie Mae. “Lenders’ comments suggest that competitive pressure and more favorable guidelines for GSE loans have helped to bring about more easing of underwriting standards for those loans. We believe that the GSEs’ attempts to relieve repurchase concerns and expand credit for creditworthy borrowers have contributed to the easing trend. Meanwhile, market competitiveness also led to the fourth consecutive quarter in which lenders’ net profit margin outlook deteriorated. The share of lenders citing competition from other lenders as the key reason for a negative profit market outlook rose to a new survey high.”

Morning Report: Retail sales come in strong 8/15/17

Vital Statistics:

Last Change
S&P Futures 2469.0 5.5
Eurostoxx Index 376.7 0.6
Oil (WTI) 47.2 -0.4
US dollar index 86.6 0.3
10 Year Govt Bond Yield 2.25%
Current Coupon Fannie Mae TBA 103.09
Current Coupon Ginnie Mae TBA 103.97
30 Year Fixed Rate Mortgage 3.88

Stocks are higher this morning on no real news. Bonds and MBS are down.

Retail Sales came in stronger than expected, with the headline number increasing 0.6% and the control group increasing the same amount. The Street was looking for a 0.3% increase. On a year-over-year basis, sales rose 4.2%. The Atlanta Fed is predicting a big uptick in growth from Q2 to Q3, and retail sales will be a big driver. We are entering the back-to-school shopping season, which is second only to the holiday season in importance for the retail sector. Consumption is about 70% of GDP, so as retail sales go, so goes the economy.

The Empire State Manufacturing Survey shot ahead again last month, hitting the highest level in 2 years. Meanwhile, inflation remains under control as import prices rose 0.1% last month and are up 1.5% YOY. Business inventories also rose .05%.

The NAHB Housing Market Index rebounded in August to 68, which is getting close to its highs. The NAHB says that labor shortages are worse in July than they were a year ago. In some trades, 3/4 of all builders surveyed report either “serious” or “some sort” of shortage of labor. The last time we saw these sorts of levels was in late 2000, just as the real estate market was heating up. This will limit building and keep home prices well-supported.

The Despot reported better than expected earnings as homeowners continue to invest in their appreciating homes. They are looking for comparable store sales to increase 5.5% and took up earnings guidance. Note that contractors are using Amazon more and more, so be careful with the stock.

Down payments are at the lowest levels in 7 years, with the growth mainly occurring in the high single digits are, not at the 3.5% area. It looks like the growth is coming from Fannie and Fred’s low downpayment programs, which are wresting share from FHA. Performance on these loans will probably be determined by the continued price appreciation in the US housing markets. While general riskiness is higher than it was 5 years ago, it is nowhere near the risk we had during the go-go years.

The Trump Administration is trying to pivot to tax reform after the debt ceiling is handled. Both NAR and NAHB have come out against any sort of plan to eliminate the mortgage interest deduction. Trump’s plan is to eliminate the deductions for state / local taxes as well as the mortgage interest deduction in exchange for doubling the standard deduction. NAR is warning that this will hit housing prices, however with inventory so tight, I cannot see that happening. FWIW, if you were ever going to eliminate the mortgage interest deduction, now would be the time to do it, since rates are so low. Mortgage interest is around 70% of the first year’s mortgage payment today. 30 – 35 years ago, it was above 90%. NAR sees about half the people currently taking a deduction to stop. Of course their tax bill isn’t necessarily going up – they will find that taking the standard deduction will be more advantageous than indexing.

Home sales and prices are slipping in Canada, which has a real estate bubble bigger than the one we had in 2006. Fallout from the Canadian bubble bursting will probably affect pricing in places like Seattle, which has been red-hot for the past couple of years.

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.

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