Study: Home Prices Are 33% Cheaper Than In 2006

Tim Lucas
Tim Lucas
The Mortgage Reports Editor
April 23, 2017 - 4 min read

Home Prices: Not As High As You Think

Home values are rising, and have now surpassed their pre-recession peak.

Unfortunately, that’s scaring some homebuyers away.

If home prices are that high, the logic goes, they’re either overpriced or we’re headed for another downturn.

But according to a new study, “real” home prices are actually still more than 30% lower than they were at the height of the housing boom last decade.

That’s because a number of factors — low interest rates, inflation, and strong income growth — make it as affordable to own a home as it was in 2009.

It’s still a fantastic time to be looking for a first home.

“Real” Home Prices 33.1% Cheaper Than In 2006

Each month First American Title Company publishes its Real House Price Index (RHPI), a gauge of home affordability in the U.S.

It’s a different kind of index because it measures more than just raw dollars.

Most reports — such as the FHFA House Price Index and Case-Shiller — measure average home prices, not adjusted for inflation an not taking into account current mortgage rates.

The RHPI includes these elements, plus kicks in wage growth to determine home affordability on a historical scale.

Results from the most recent report were surprising.

“Real” home prices are nowhere near their peak in 2006, according to the index. In fact, homes are 33.1% more affordable than they were more than ten years ago.

To the everyday home shopper, it may not feel like home prices are that low. After all, prices have risen by about one-third since 2012 and show no signs of slowing down.

But other elements are seriously pushing up affordability.

Mortgage rates are still incredibly low from a historical perspective. In 2006, the 30-year mortgage rate averaged 6.41%. Compare that to today’s rates in the low fours.

And, wages are much higher now.

According to the Bureau of Labor Statistics, hourly wages in the U.S. averaged just over $20 in 2006. That has since jumped thirty percent to $26. What you make has a lot to do with your buying power.

In all, yes, home prices are nominally higher than they were before the housing downturn. But affordability has rarely been better than it is right now.

Inflation Is Helping Home Buyers

Most consumers view inflation as a bad thing.

Too much of it certainly is.

But steady, predictable devaluation is actually helping home buyers.

Home prices are rising, but not as fast as everyone thinks. According to a recent report released by Case-Shiller, home prices rose 5.6% year-over-year in December 2016.

But a statement released alongside the data suggested home prices increased just 3.8% after accounting for inflation.

So, real cost increases over the past 12 months are lower, thanks to inflation.

For example, a home listed at $250,000 one year ago comes with the “same price” today, even though its nominal price tag is now $255,000. This is true because the dollar is depreciating around two percent per year.

Buyers with sticker shock should consider inflation. Maybe that home isn’t quite as spendy as it first appears.

Loan Programs Make It Even More Affordable To Own A Home

The First American Title Real Home Price Index reveals that homes are still priced affordably.

But real estate is becoming more accessible, thanks also to the myriad of loan programs on the market.

Lenders are loosening standards daily, and allowing more applicants into the ranks of approved borrowers.

According to a recent study by mortgage software company Ellie Mae, more than 3-in-4 home buyers are now receiving approvals.

You can credit part of that success to lenient loan programs.

The popular FHA loan — used by about 40% of buyers under the age of thirty-seven — requires just a 3.5% down payment. Credit score minimums are low, and borrowers with scores down to 600 are often approved.

For home buyers with almost no cash on hand, the USDA loan is a real option, offering a zero down payment requirement and very low mortgage insurance. Eligibility is based on location of the home, and the applicant’s level of income being at or below 115% of their area’s median income.

Another zero-down program is the VA home loan, which is reserved for those with military experience.

Even conventional loans come with a 3% down feature.

All in all, mortgage programs are available nationwide, and lenders are eager for home purchase loan business.

What Are Today’s Rates?

Mortgage rates are low, and going lower.

If you’re on the fence about buying a home, start with getting a mortgage rate quote, which comes with a pre-approval analysis. You might be surprised at what you can afford.

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