Is Real Estate Unnaffordable?

With silver finally experiencing a mini-correction today, I am gladly taking a break from talking about it. I’m sure there will be plenty of time to talk about silver in the months ahead. Today I want to focus on the latest Case-Shiller report.

The Case-Shiller home price index fell for the 8th consecutive month in February. Home prices are now hovering sightly above the lows of April 2009. 10 out of the 11 cities that made lows in January made new lows in February. Housing in America is basically going the opposite direction of silver. Take a wild guess as to which asset I’m getting bullish on?

Home Prices Still Too Expensive?

Yesterday I came across a post at The Big Picture that said home prices are still way too expensive. The rationale was that median home prices divided by median income was still above the historical mean. Here’s the chart from the post.

I definitely agree that income growth and home price appreciation go hand in hand; after all, people need to make their mortgage payments based on their income. However, this analysis fails to account for mortgage rates. Let’s imagine that median incomes rose by 20%, bringing the median home price/median income level to 3. Would this suddenly make homes affordable? Not exactly. What if mortgage rates rose to 20%? Obviously interest rates play a major role in home affordability.

That being said, home affordability is at multi-decade lows. It takes a much smaller portion of income to buy a house now than it did just a coupe of years ago. I don’t know where all the “homes are still expensive” arguments are coming from. Relative to income, homes are cheap.

As you all know, I eat my own cooking. The values in real estate are starting to look very compelling. It’s interesting to me that people are getting bullish on silver after a huge runup while they are getting bearish on real estate after a huge drop. Both deflationists and hyperinflationists seem to hate real estate as an investment, which is great as far as I’m concerned. Sooner or later, there will be a bounce in real estate. I am very confident it is coming in the next year.

Is Real Estate Unnaffordable? is a post from: Expected Returns

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