Home prices in the D.C. region and elsewhere are at, or near record highs. But the No. 1 consideration for buyers isn’t the home price. It’s how much of their income will go to the mortgage payment.
The only thing that affects the size of a mortgage payment, other than the down payment, is the interest rate. The only thing that affects the share of household income the mortgage payment eats up is how big that household income is.
The First American Financial Corporation’s Real House Price Index shows what may seem unexpected about affordability in this housing market boom: Compared to the last housing boom in 2006, it is more affordable now.
“Changing incomes and interest rates either increase or decrease consumer house buying power. So the incomes rise and mortgage rates fall, [and] consumer house buying power increases. And the opposite is also true,” said First American Chief Economist Odeta Kushi.
Household incomes have risen an average of about 40% since 2006. Mortgage rates, although rising, are considerably lower than what they were then. As a result, the Real House Price Index indicates it is 27% more affordable to buy a home now than it was in 2006.
And the D.C. area ranks at the top of its list, with affordability improving 53% from its peak.
“So while nominal house prices in the D.C. metro have surpassed the 2006 housing boom peak, house buying power is much higher than what it was back then, thanks to lower mortgage rates and higher household incomes,” Kushi said. “So house buying power has more than kept up with nominal prices,” Kushi said.
Going back 16 years covers a lot of ground, and First American notes that homes are less affordable now than they were a year ago. Home prices are expected to keep rising, and mortgage rates are likely to rise as well, so it is likely that affordability will decline further.
Even so, First American said that, in most markets, house buying power is still a long way from falling to what it was during the mid-2000s boom.
The full Real House Price Index is available online.