But what trumps everything else is value – what you’re getting for your money. And when you start thinking seriously about value, housing “affordability” is the ultimate measure in the housing market. Essentially, housing affordability is a combination of three things: the house price, the mortgage rate, and household income. Household income doesn’t change a whole lot over time. So interest rates and house prices are what affect housing affordability the most. Now, as we saw earlier, house prices are at an all-time peak. But thanks to ultra-low mortgage rates, housing in the U.S. is still incredibly affordable . Take a look at the chart to the right. This chart distills the three pieces that make up affordability into one simple number. A reading of 100 means a typical person can afford a typical house in the U.S. A reading of 150 means he could afford 150% of the typical
You need to answer the question, “What am I getting for my money?”
The price of an investment isn’t the only thing to consider. Ultimately, what you need to consider is value , not price. You need to answer the question, “What am I getting for my money?” We will look at this idea in the context of house prices first... Then we’ll look at it with U.S. stocks. I like to look at a few indicators to see where we are in the housing market cycle – such as new building permits, new housing starts, and the overall supply
Housing Affordability
of homes on the market. We’re a long way from the previous peaks in these indicators. In short, new homes today are being built at half the rate they were at the peak of the housing bubble. That tells us we’re not near a top in the housing market yet.
110 120 130 140 150 160 170 180 190 200
2006 Peak: Unaffordable
2019: Still Affordable
2012 Bottom: Affordable
Source: Bloomberg
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American Consequences
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