Major stock indices were relatively flat this week as November inflation data was released. It showed that consumer prices rose 0.3% in November and the annual inflation rate is 2.7%, all as expected. However, producer prices rose 0.4% in November, higher than the forecasted 0.2%. Ultimately, the November reports are benign and should not have an effect in the Fed’s decision to cut interest rates this month.
Housing affordability is a problem that has many ripple effects across the US economy and is not likely to get much better anytime soon. The Atlanta Fed tracks a simple affordability index on its website that does a good job of illustrating the problem, even though there is a considerable lag in the data. The latest reading is from August.
Any reading below 100 is considered to be “unaffordable”. If we take their median US household income of $85,255 per year and divide it by 12 we get a monthly household income of $7,105. A financial planning rule of thumb recommends spending less than 30% of gross monthly income on housing, or $2,131 per month for the median US household. However, the Atlanta Fed calculates that the median home price ($392,500) and current average interest rate (6.5%) yield a median monthly payment of $2,997, or 42% of the median household monthly income. Spending 42% of household income on housing puts a huge strain on the rest of the family budget.
But the top 3 considerations when dealing with real estate are location, location, and location. The index maintained by the Atlanta Fed is using national averages, while income and home prices vary greatly across states and communities. Using local data and the 30% rule (monthly mortgage payment versus monthly gross income) we see that only 2 states currently have affordable housing.
This is a math problem with just a few major variables. Since moving to Iowa or Ohio isn’t an option for everyone, we need to see some combination of the following:
- Lower home prices
- Higher household income
- Lower interest rates
Of these 3 factors, we believe mortgage interest rates are the least likely to decline enough to make a big difference. That leaves higher household income, which is inflationary, and lower home prices.
Have a great weekend.
Jack C. Harmon II, CFP®, CIMA
Principal, Harmon Financial Advisors
Registered Principal, Raymond James Financial Services
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