September 13, 2011

 

Introduction 

 

       - 10 - 

Share of Population in Multi-Generational Family Household 

by Race/Ethnicity, 2008   (%) 

 

Source: Pew Research Center  

Affordability 

Beyond the various classic signs of bubble formation, the most basic observation that compelled Asset 

Analysis Focus to voice our negative outlook on the housing industry (homebuilders) in January 2007 was that 

housing had simply become unaffordable. The national median home price reached $247K in 4Q 2006, up 54% 

from 2002 levels.

1

 The NAHB/Wells Fargo Housing Opportunity Index stood at just 41.6 in 4Q 2006, versus a 

previous low of 53.9 at the time of the HOI’s inception in 1Q 1992. Based on median home prices and mortgage 

rates in 2006, a home purchase would cost 23% of pretax income in monthly mortgage payments for the median 

income household. This implied almost half of purchasers would be taking on monthly mortgage payments above 

the maximum safe or ‘qualifying’ level (25% of pretax income).  

Of course, these payment obligations estimates assumed borrowers were taking out 30-year fixed rate, 

80% loan-to-value mortgages. However, in reality, all kinds of nonstandard loans were being issued featuring low-

to-no-down payments, negative amortizations, ‘teaser’ low initial rate ARMs, etc. These gimmicks reduced 

mortgage payments in the short run, but only deferred the inevitable costs and created unsustainably large 

mortgage obligations for borrowers down the road. Rising home prices sustained this housing bubble for even 

longer than we expected and many home ‘flippers’ were able to capture a quick profit along the way. However, by 

January 2007 we recognized the stable long-term, buy and hold-based housing demand needed to sustain the real 

estate market was being rapidly priced out of existence. 

 

Median U.S. Existing Home Prices, 1990-2011 

$80,000

$100,000

$120,000

$140,000

$160,000

$180,000

$200,000

$220,000

$240,000

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

11

Median Home Price to Income Ratio, 1970-2011 

2.0x

2.5x

3.0x

3.5x

4.0x

1

970

1

972

1

974

1

976

1

978

1

980

1

982

1

985

1

987

1

989

1

991

1

993

1

995

1

997

1

999

2

001

2

003

2

005

2

007

2

010

Source: National Association of Realtors    http://www.realtor.org/research.nsf/pages/HousingInx 

                                                      

1

 NAHB Economics & Housing Policy Group 

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Introduction 

 

       - 11 - 

Today, the housing picture looks almost like the complete opposite of what we witnessed just a few years 

ago. According to the National Association of Home Builders (NAHB), median national home prices have declined 

32% from the 2005 peak to $172K in 2Q 2011—essentially back to 2002 price levels. In real terms (adjusted for 

inflation ex-shelter), home prices have actually declined all the way back to 1999-2000 levels. The NAHB median 

price also represents only 2.8x the current median family income versus 3.8x in 2006. While the current price-to-

income ratio is only slightly below the long-term historical average of 2.9x looking back to 1970, housing 

affordability is further supported by the current ultra-low interest rates. According to Freddie Mac’s survey, 30-year 

fixed rate mortgages averaged 4.12% as of September 8, 2011. This represents a decline of 228 bps from the 

average rate in 2006 and is a record low dating back to the survey’s inception in 1971.  

 

40-Year Interest Rate Trends 

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

Jun

-7

4

Jun

-77

Ju

n-

80

Ju

n-

83

Jun

-8

6

Jun

-89

Ju

n-

92

Ju

n-

95

Jun

-9

8

Jun

-0

1

Ju

n-

04

Ju

n-

07

Jun

-10

Ma

r-

11

Ju

n-

11

Au

g-

11

5-Year Interest Rate Trends 

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Source: Freddie Mac 

 

This combination of lower housing prices and historically low interest rates has produced record housing 

affordability levels. Based on the average home price and 30 year mortgage rates (80% LTV), monthly mortgage 

payments represented only 13.5% of median family income in 2Q 2011 versus the aforementioned 23% average in 

2006. The National Association of Realtors’ (NAR) Housing Affordability Index, which measures this ratio, climbed 

from 107.6 in 2006 to reach an all-time high (dating to 1970) of 190 in 1Q 2011 and currently stands at 176.9. The 

previous annual high was 154.8 in 1972. While a marked rise in interest rates would reduce affordability, 

Fed Chairman Bernanke’s recent indication that short-term interest rates will be held at near-zero levels through at 

least mid-2013 appear to minimize this risk over the medium term.  

Home Ownership vs. Rental 

Not surprisingly, the bursting of the housing bubble and the recent recession made renting an increasingly 

popular alternative to owning a home. Rationales including wealth destruction, efforts to de-leverage and reduce 

risk, low access to credit, foreclosure/rent-back activity, individuals’ generally negative outlook toward a rebound in 

home prices, etc. have all pushed individuals toward renting. As a result, homeownership rates have declined from 

a peak of over 69% in 2006 to 65.9% in 2Q 2011, according to Fannie Mae. This is the lowest rate observed since 

1Q 1998. Homeownership rates are still somewhat elevated versus longer-term (pre-1995) historical levels, 

although underlying structural changes such as the outsized impact of the aging baby boomer generation and 

greater governmental support for owning a home can explain much of the longer-term shift toward higher 

homeownership rates.  

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