In another sign that house prices are finally slouching their way toward a bottom, another measure of housing “affordability” has now hit a level not seen since the 1960s. Too bad no one has any money to buy them with.
In this case, unfortunately, housing affordability is likely overrated as a price indicator, because so many would-be buyers are underwater on their own houses. (It doesn’t matter if you can buy your neighbour’s house for cheap if you would lose your shirt raising the money you need to buy it with.) But the increasing affordability is nonetheless a positive.
[I]n terms of the level of mortgage rates, the sale price of houses and the income of families, the affordability of home purchase of late is higher than it has been in about 40 years (see Chart 1). With Thursday’s release of flow-of-funds data by the Fed, I can demonstrate yet another factor suggesting the current attractiveness of a home purchase – the implicit yield on owner-occupied housing in relation to the cost of financing a house purchase. I calculate the implicit yield on owner-occupied housing by dividing the “space rent on stationary owner-occupied housing” (from unpublished GDP data pertaining to personal consumption expenditures) into the market value of household real estate (from the household balance sheet data in the Fed’s flow-of-funds accounts). Then I compare this implicit yield on owner-occupied housing with the level of mortgage rates pertaining to the sales of existing single-family homes. Chart 2 shows a history of this calculated implicit yield on housing and the financing or mortgage rate.
In the first quarter of 2009, the implicit yield on owner-occupied housing was 6.02%; the contract
mortgage rate was 5.07%. The data in Chart 2 show that it is rare for the implicit yield on housing
to be above the cost of financing a house. In fact, from the late 1960s until now, the implicit yield
on housing has always been below the mortgage rate…In sum, the higher relative implicit yield on owner-occupied housing is yet one more positive element arguing in favour of the bottoming of housing demand.
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