- Goldman Sachs said US house prices remain relatively affordable, according to its metrics.
- A fall in mortgage costs is counterbalancing the recent surge in home prices, its analysts said.
- Yet there are big regional differences, with the West Coast very pricey compared to St. Louis and Detroit.
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US house prices are relatively affordable despite the surge in property values seen during the coronavirus pandemic, Goldman Sachs has said.
Home prices soared in the year to January, rising at the quickest rate since 2006 thanks to ultra-low interest rates and a demand for change during the COVID-19 crisis.
But Goldman analysts, led by Apurva Gundaria and Marty Young, said in a note Tuesday housing remains affordable by historical standards thanks largely to a marked decline in mortgage rates.
Goldman’s home affordability index, which compares household income levels to mortgage costs in the economy, currently stands at levels seen in the 2013-2016 period despite the jump in prices.
Mortgage rates have dropped sharply over the last year and a half as the Federal Reserve has slashed interest rates to record lows and snapped up bonds, pushing yields down.
The cost of mortgages has also dropped over the longer term as interest rates have fallen in advanced economies.
The 30-year fixed mortgage rate stood at 3.13% in the week ending April 7, Freddie Mac data showed, down from 4.4% three years earlier and 7% 20 years ago.
“Despite the recent run-up in prices, US housing still appears affordable, both on a price-to-income basis as well as a buy-versus-rent basis, relative to historical standards,” Goldman analysts said.
“The reason: The long-run decline in mortgage rates has been large enough to offset the impact of rising house prices.”
Unfortunately for potential buyers on the West Coast, however, house prices are far from affordable everywhere.
Goldman’s affordability indicator found Los Angeles was the least affordable of the 25 largest city areas, with San Francisco and San Diego close behind. The most affordable were St. Louis, Detroit and Houston.
But Goldman said the affordability list could well change thanks to more people being able to work from where they want after COVID.
The bank’s analysts also predicted that housing affordability will improve marginally through the end of this year, “supported by the boost to incomes from fiscal stimulus and swift labor market improvement.” It is then set to dip slightly in 2022 but remain on a par with 2017.
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