Homes: Most Expensive in 5 Years


Bad news for prospective home buyers: Houses are getting pricier.

The latest reading of the National Association of Homebuilders (NAHB) Wells Fargo Housing Opportunity Index (HOI) shows that homes have continued their recent trend in the third quarter of becoming more and more expensive.

The HOI measures what percent of homes sold would be considered affordable based on the price of the house, the income of the person purchasing the house, and a variety of other factors. In the third quarter, 64.5% of homes were considered affordable, down almost 5 percentage points from the level of 69.3% seen in the second quarter of this year. In addition, home prices continue to rise, and the average price of homes sold grew by 5%.

The reading of 64.5% was the lowest level of affordable homes sold since the fourth quarter of 2008, when the HOI stood at 62.4%:

Source: National Association of Home Builders.

In addition to the affordability of homes plummeting relative to the conditions of the home buyers, a big reason for this is the continual rise in home prices seen since the bottom of the market in 2012:

Source: National Association of Home Builders.

As you can see in the chart found above, the average price of sold homes rose to $211,000 in the third quarter. Since the first quarter of this year, the average median sales price has risen by 15%. Since the first quarter of 2012, the median home price has risen more than 30% from $162,000.

In addition to home prices rising and affordable home sales becoming less and less prevelant, American consumers have also seen a substantial rise in interest rates:

Source: National Association of Home Builders.

Average interest rates jumped from an average of 3.73% in the second quarter to 4.44% in the third quarter, or a difference of 0.72%. This increase was the largest quarterly charge in interest rates seen since 1996. The Federal Reserve began tracking 30-year mortgage rates in 1971, and the change was the 12th-highest quarterly change seen on record:

Source: St. Louis Federal Reserve.

However, when you see that a rise of 0.75% is on an absolute basis, this has a much more dramatic impact when rates were low to begin with. When doing the gain relative to the level of the previous month, it turns out the 20% increase from 3.69% to 4.44% is actually the highest level seen on record:

Source: St. Louis Federal Reserve.

Indianapolis supplanted Ogden, Utah as the most affordable large city in the country, as the HOI reading for Indianapolis stood at 93.3% in the third quarter. San Francisco continued its reign as the most expensive city when it came to housing in America, the fourth quarter in a row in which it held that title. Only 16% of the homes in San Francisco were considered affordable. The comparison between Indianapolis and San Francisco is available below:

Source: National Association of Home Builders.

While a recovering housing market is certainly a good thing, and for every person buying a home, there is a seller who gains from higher home prices -- such dramatic changes in affordability, interest rates, and home prices is a trend we have seen before and likely don't want to see again.

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