Case Shiller Index of Home Prices in 20 cities rose 0.1% in May after having been unchanged n April and having climbed 0.3% in March. Five years ago home home prices were rising at a 10.5% rate. A year ago they were still climbing at a 6.5% pace. But home prices continue to slow and over the course of the past year home prices have risen 2.4%. In the past three months they have climbed at a 1.9% pace. Clearly, the rate of increase in home prices has slowed significantly.
Some economists previously feared that the earlier run-up in home prices and an increase in mortgage rates had made housing unaffordable for many. However, the rate of increase in home prices has slowed sharply. At the same time, mortgage rates have declined 1.1% to 3.8%.
The chart below from the National Association of Realtors indicates that the housing affordability index now stands at about 150.0. This index combines the effect of house prices, mortgage rates, and consumer income. The level of the index means that consumers have 50.0% more income than is necessary to buy a median priced home. To put the current level in context, just prior to the recession in 2007 consumers had 14% more income than was necessary to purchase a median priced home. Housing at that time was very expensive. Housing today remains affordable because the rate of increase in home prices has slowed, mortgage rates have declined, and consumer income is also rising.
There is an acute shortage of homes available for sale. The inventory of existing homes is at 4.4 months which is well below the 6.0 month supply that is generally regarded as the point where supply and demand are roughly in balance. If more homeowners would put their homes up for sale, existing sales would be far higher than they are today.
Stephen Slifer
NumberNomics
Charleston, SC
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