Is Housing Still Overvalued?

It’s no secret that housing prices have declined dramatically in many parts of the country. Yet some people are still arguing that prices still have a long way to fall before they become affordable. Are they right?

Data compiled through the Housing Affordability Index (HAI), an index created by the National Association of Realtors® shows that owning a home today is 59.48% more affordable than it was in 2006, although the median home prices have only fallen by about 18.1% over that same time frame. Why the huge difference? Mortgage rates are lower today than they were in 2006! This means that an 80% mortgage based on today's interest rates and home values is much more affordable than an 80% mortgage based on 2006 interest rates and home values.

Therefore, housing could actually become less affordable even if house prices decline slightly from their current levels! This is because mortgage rates could increase, driving up your monthly payments and the costs of owning that home over time. Further, once house prices stabilize and/or go up, mortgage rates will likely be higher as well due to less government intervention in the mortgage markets. This will significantly drive down the affordability index. So, if affordability is your measurement, housing is NOT overvalued. In fact, housing might even be dramatically undervalued based on these measurements of historical affordability!

~ Courtesy of Wendy Charles, CMPS, LoanCentral LLC, WendyC@LoanCentral.com, 425.468.9321