Real Home Prices and Real Borrowing Costs Since the Bottom
POSTED TUESDAY, FEBRUARY 04 2014
I previously showed that continuously declining interest rates since 1980 have been a boon to the buying power of homeowners despite stagnant incomes. After the bursting of the housing bubble last decade and subsequent fall in home prices, the historically low interest rates that followed led to remarkably low payments for borrowers who could still qualify for mortgages these past few years. But we’ve long since put in a bottom for home prices. According to Case-Shiller’s 20 city aggregate that bottom came in February of 2012.
The chart above shows the change in real home prices (blue line) since the bottom. After February 2012 home prices began to rise while mortgage rates continued to fall. They fell enough in fact that their declines offset the rise in real home prices for another 8 months. That is, a borrower could obtain a lower mortgage payment via falling borrowing costs despite rising home prices. The bottom in terms of a monthly mortage payment didn’t come till October of 2012. The red line shows how mortgage payments have changed since then.
In short, real home prices have risen about 17% since the February 2012 bottom, but the real price in terms of borrowing costs have risen just over 26%. I don’t expect rates to leap in the near future, but if rates continue to rise with Fed tapering (they’re up about one percentage point from the bottom) it could have a notable impact on affordability for first-time buyers. On the other hand, low existing home inventory suggests there hasn’t been a significant falloff in demand yet and mortgage rates have been trending down again recently as well.
THE HOUSE PRICE DECLINE – THE 30,000 FOOT VIEW
1 DECEMBER 2011 BY CULLEN ROCHE
I can still remember the day I first came across the real house price chart in 2005. For me, it was the defining chart of the housing bubble. After all, how could house prices deviate so far from the rate of inflation which is so directly tied to wages? This seemed like such an obvious concept. And to me it perfectly showed the disequilibrium in the housing market. That disequilibrium and ensuing contagion turned out to be far greater than I presumed, but it shows the power of standing back and taking a 30,000 foot view at the macro picture. This one chart perfectly summarized all of my work on real estate in the years leading up to the peak. This is one of the beauties of charting. It doesn’t tell you the whole picture, but it certainly helps provide you with some perspective.
More importantly though, what is this chart telling us today? The updated version is attached below. Current levels are still consistent with an overvalued housing market though not nearly as bad as things had been just 5 years ago. The most recent reading of 114 tells us that housing prices are still at the upper end of the range their historical range:
Another way of looking at housing prices is comparing the government’s owner’s equivalent rent index to the national house price index used by Case Shiller. This tells us a similar story to the real house price index. There is currently about a 15% discrepancy between the two:
The 30,000 foot view concludes: US house prices are still expensive. And while they may not be in a free fall any longer we’re unlikely to see any substantial rebound in the near-term.