Is Housing Affordable?

The NAR Affordability Index has been knocked in the past for not representing the housing market correctly. It tends to overstate the health of the consumer and understate the weakness. It takes into account Median single family homes values, median income and current mortgage rates manipulating the data so it gives a the payment percent of income and a qualifying income (which is explained here). The data does not appear to take into account rising local tax rates. Further, I am not sure if it takes an average interest rate for a weighted average interest rate. The difference, in today's world particularly, is somewhat major given the state of the credit markets.

In looking at the data over the past year, the price of existing homes and the mortgage rate have been decently correlated with both rising and falling together in most cases. For the June data, the price of an existing home moved up about 6k to 213k. The mortgage rate jumped more aggressively to the upside to 6.28. From what I can gather of the rate markets over the past month, this 6.28 has been about the level for conforming rates, via FNMA generics. However, prices of sales in July and August for that matter, have declined somewhat aggressively. Essentially, prices have fallen but the credit markets have not followed. This is somewhat of a worrisome trend and could derail my housing thoughts from this morning.

In terms of the bigger picture, the housing affordability index, when combining the idea that only people with income can buy a home, has actually been strengthening at a greater pace over the past year. Payments as a percent of the median price fell under 20% earlier this year. If you take into account those who can make the payments, this argues that the market may actually be stronger than these numbers indicate. This means that the general stress that housing payments became, are now unwinding. If this stress unwinds, when combined with lower gasoline prices (and perhaps heating bills as Natural gas gets clubbed), could create some growth in consumer spending come the fall. Further, if there is less stress in the payments, then that raises the probability that many of these written down CDO's or other mortgages debts, starts to find a pulse. This could lead to write ups in the coming future.

Now, I need to do some more search on this idea but I figured I would share it as it seems like perhaps things are improving as stresses unwind in the economy - this contrary to the popular belief on the economic bears side of the ledger.