Market conditions, reminiscent of the previous housing bubble, have rekindled fears of a subsequent housing sector decline. Statistics released by the National Association of Realtors (NAR) served to facilitate said fears, as their home price affordability index dipped below a long-term trend line. According to the index, July was the unfortunate beneficiary of the lowest level of home affordability since 2009. Some economists fear for the worst, as houses are becoming increasingly unaffordable and wages are unable to keep up.
The index, as its name suggests, reflects the household income needed to qualify for a traditional mortgage for a median-priced single-family home.
The change in the index report is directly correlated to higher mortgage rates and home prices. Property values have increased approximately 13.4 percent compared to this time a year ago. While encouraging, the trend shows no signs of slowing down. Mortgage rates have experienced similar increases, as they are currently at their highest average since February 2012. Conversely, while wages are rising, they are unable to keep up with the pace of home prices.
Not surprising to many, are the decreases in affordability witnessed on the West Coast. California, in particular, harbors four of the top five least affordable housing markets. Home prices in the west climbed 18.4 percent over the last year.
The NAR’s affordability index peaked in January at 210.7, and it has been falling ever since. It now stands at 157.8 on a national level. Note that anything over 100 on the index indicates that median income is higher than needed to qualify for a mortgage. “A score of 157.8 officially indicates that a household earning the median income has 57.8 percent more income than needed to get a mortgage on a median-priced home,” CNBC reports.
Some economists have interpreted the recent drop in the index as a possible housing bubble indicator. More specifically, three economists from Robert Morris University in Pennsylvania collaborated in drafting a report that acknowledged the possibility of a new bubble. According to the report, when the index falls below trend for at least three months, it may be an indication of the beginning of a housing bubble.
Compounding their concerns, are similarities between today’s market and the beginning of 2004, when home affordability fell below its long-term trend. Many point to 2004 as the start of the bubble and fear we may be repeating past trends. Housing affordability this year dropped below the long-term trend in April and has stayed there through July, CNBC reports. Having been below the trend for three months, people are starting to panic.
Despite the recent report, some analysts refute the possibility of an impending housing bubble. According to NAR experts, housing affordability likely could strengthen in the coming months “as prices have decreased from a month ago and most likely reached their seasonal peak for the year. Even with rates increasing, certain metro areas have healthy inventory levels, and consumers can still look to purchase before those historically low rates are a thing of the past.”