The housing market has been picking up, and house prices have been increasing. However, house prices remain below the 2006 housing bubble high of $248,000. If we adjust house prices for inflation since 2006, where house prices would be $280,001, house values are roughly 20% off from pre-housing bubble levels.
Home prices and interest rates
Interest rates on 30-year fixed mortgages remain at historic lows in the 4s from 3.6% to 4.2%. Low-interest rates make for a combination that increases buying power while also reducing monthly payments—making it easier for buyers to qualify for a home loan, financing, even in a competitive seller’s market with multiple offers driving up house sale prices. This is relative to house prices, interest rates, and income.
As for appreciation, housing market data from the past shows that house prices have increased 0.7% per year after adjusting for inflation, roughly similar to the 2.5% annual house price appreciation since 1986 according to the Case-Shiller house price index.
So house prices are considered high, with historically low-interest rates assisting in making buying a home more accessible than at anytime since before the 2008 economic crisis. One also has to consider the real estate market, which industry experts say now favors sellers who now have more choices. For the buyer inventory is very limited, leading house sales volume to be slow.
What you can afford
House prices and interest rates are not the only factors in house buying. There is also how much house you can afford, such as house loan affordability which is based on appreciation, house prices, income, and interest rates. Income will be the best predictor of house price increases over time if we use a combination of sales volume and house price/interest rate changes to estimate house prices in the future (similar to long-term housing market trends).
For example, buying a home in Montana, based on data from realtor.com, where there were 39 houses for sale in Bigfork, Montana, an average home price was $1 million, equivalent to 38 times higher than median household income in Flathead County at $34,408 (2014 Census Bureau Data).
Or in Butte, Montana, house prices were estimated to go up by 10% in 2015. At that rate, house price appreciation will be about nine times higher than household income growth which is why house affordability remains a problem for many would-be house buyers, especially when house prices are already considered high relative to incomes.
This means house loan affordability requires considering house prices and how much you can qualify for on your mortgage loan payments or down payment before your monthly housing payments become too burdensome. A good rule of thumb is no more than the equivalent of 1/3rd of what you earn each month if you have other debts such as student loans, credit card bills, and a car. If you have no car loan or student loan debt, house loan affordability can be as much as two-thirds of your monthly income.
This is considered house payment affordability for those who have saved a down payment putting 20 percent down. In general, you should aim to put as much as possible that house loans are long-term investments and house values appreciate over time, making house buying more affordable the longer you stay in your home.
However, keep in mind that house prices and rates for 30-year fixed-rate mortgages (FRM) only remain low for so long. Interest rates may rise at any point leading to higher monthly payments even if house prices remain stable after increasing. Even if house prices go up enough to cover the increase in house payments and you can afford house loan affordability in the future (and house values appreciate), it is still good to buy when house prices are lower with interest rates low. This reduces house payment affordability risks for you, allowing you to more easily meet your house payment obligations if house prices go down or even remain stable despite potential rate increases.
With so many things to consider, such as house loan qualification, bond market dynamics, and job markets, no one knows what the housing market will do in the short term but looking at long-term data helps provide some insights into how we may fair in different parts of the country and helps us form strategies that affect how we approach our house-buying decision. So be sure to look at house prices and interest rates over a long period to understand what has happened in the past before rushing into house-buying decisions.