Home Sweet Home

Home prices have been increasing in the United States over the last few years, but prices adjusted for inflation, have still not risen to the levels seen in 2006. Nominal prices have fully recovered but real prices are still 14% below the levels they were 12 years ago.

Prices are up 6.9% over the last year in the latest nationwide value report by CoreLogic.

This chart shows the changes in the Home Price Index (HPI) that CoreLogic tracks. Note that the western states of Washington, Idaho, Nevada and Utah have seen the highest one-year home price increases---all have had double-digit increases over the last year.

More telling is the fact that CoreLogic reports that it now finds that more than half (52%) of the nation's 50 largest housing markets are now overvalued. Only 14% of these markets are considered undervalued.

CoreLogic determines affordability "by comparing home prices to their long-run, sustainable levels, which are supported by local market fundamentals (such as disposable income)." A market is considered overvalued when home prices are at least 10 percent higher than the long-term, sustainable level.

The rise in housing prices together with the rise in mortgage rates is making more homes unaffordable in a number of markets.

Consider the math.

In May, 2016 the average 30-year mortgage rate was 3.60%. To purchase a $300,000 home with a 20% down payment resulted in a $1,091 monthly mortgage payment.

Today that $300,000 house is more likely to be a $340,000 house. The additional down payment requires another $8,000 up front. The current mortgage rate is now around 4.50%. That means the monthly payment has risen to $1,378/month. You can be sure that the property taxes and insurance are higher as well.

Over various points in my lifetime over the last 40 years I purchased homes with mortgage rates of 10.75%, 8.50%, 7.50% and 6.75%. Then again, my last mortgage rate was 2.875%.  I can assure you that based on historical norms, rates can go much, much higher than they are today. Unless the amounts that people get paid go up with interest rates, houses will get more unaffordable until they start dropping in price to a point at which people can afford them.

That is basic economics and we saw how that works in the 2008-2010 period.

Unison does a report that compares housing affordability across the country by examining the amount of income that is necessary to purchase a median priced house in various markets. It assumes a 10% down payment, a 4.625% mortgage interest rate on a 30-year loan, 1.25% annual property taxes and .4% annual insurance costs on the home's value. It further assumes that no more than 30% of gross income is being used for housing costs.

Here is what it takes in income to afford a median-priced house in major U.S. cities using those assumptions.

What I find remarkable is that it takes 50 times the income to buy the median home in New York City as it does to do the same in Detroit!

Those home prices in New York City, San Francisco and Boston are high so it means many in those areas are forced to rent.

However, rents are no bargain in those areas either.

Here is another interesting chart from Statista that compares how much space renters get for $1,500 per month in various cities around the world.

New York City, San Francisco and Boston are all among the highest cost cities to rent in the world.

Anyone interested in relocating to Istanbul?

However, if you move make sure you get a job that pays you in US dollars.

Turkey's currency has dropped nearly 20% against the dollar this year. In an attempt to curb the slide the central bank officials in Turkey have raised their interest rate to 16.5%!

As I said, interest rates can get much higher than we see currently in the United States.

We always like to think of the place to which we always return to be our Home Sweet Home.

Here's hoping it is sweet for you wherever you live.