Housing affordability is going to go up. In fact, it is going to become more affordable than it has been at any time in the last thirty plus years. In order to understand this, first know what the definition of affordability is according to the Federal Reserve:
Housing affordability measures the degree to which a typical family can afford the monthly mortgage payments on a typical home.
Value of 100 means that a family with the median income has exactly enough income to qualify for a mortgage on a median-priced home. An index above 100 signifies that family earning the median income has more than enough income to qualify for a mortgage loan on a median-priced home, assuming a 20 percent down payment. For example, a composite housing affordability index (COMPHAI) of 120.0 means a family earning the median family income has 120% of the income necessary to qualify for a conventional loan covering 80 percent of a median-priced existing single-family home. An increase in the (COMPHAI) then shows that this family is more able to afford the median priced home.
This index is calculated as a composite of the fixed and adjustable rate mortgages.
With that understanding of what housing affordability is, we can move to the charts to see what they show.
Analyzing the below charts with an elliott wave perspective, they are both giving the same message in two different ways. The chart of housing affordability Percentage Change from Year Ago bottomed out on Oct 2013. The pattern created from 1983 to 2013 looks to be a complete corrective elliott wave pattern. Percent change now looks poised to cross the zero line of the chart. When this happens housing affordability rises. The estimated rise should take it above the peak created in May of 1983. In hindsight who wouldn’t have gone all in with regard to buying a house in 1983.
The same chart viewed via the index scale shows an incomplete move up (motive pattern) that began before 1981 indicating one more move up to a new all-time high is very likely. Two views; one message. Looking at housing as an investment from every angle is showing that a historic; once in a lifetime buying opportunity is not too far off. Home prices moving down will be part of the mechanism by which housing becomes more affordable. Do not fear the fall in prices. The greatest opportunities are often very scary. A knowledge of price histories will confirm that truth.
Housing Affordability – Percentage Change from Year Ago
Housing Affordability – Index
To see the above chart dates and points in greater detail you can visit the FRED interactive website. Make sure you change the chart to percent change rather than index scale.