I have been wanting to discuss a horrifically misleading article for a week now: Americans Shun Cheapest Homes in 40 Years as Ownership Fades.

It is an object lesson in how an industry spokesgroup, engaging in biased analysis, used poor econometric models to create misleading data. That led to others making bad assumptions based on that data, which in turn leads to an unsupported conclusions. To wit, that home prices are now cheap (they are not) and home ownership is being shunned (it is not). Thus, the end result is a misleading Bloomberg.com article on residential Real Estate that is unfortunately based on these terribly flawed NAR metrics.

The reality is quite different than the spin. No, it is not, as objective data reveals, especially cheap.

This flawed data/PR flack/spin approach is how the NAR manages to get a false and misleading claims printed in major US media on an all too regular basis. “The most affordable real estate in a generation” nonsense in Bloomberg is only the latest hoodwinking they have pulled on journalists. Recall back in 2009, the Wall Street Journal and IBD were both snookered by the NAR’s seasonal adjustments (we discussed this here, here, here, and here).

Given the NAR’s track record when it comes to data analysis, anyone who makes any sort of purchase based on NAR spin is a fool who will get what they deserve.

All of this leads to our present discussion of Home Affordability. Back in 2008, I wrote an analysis of the Realtors’ model titled “NAR Housing Affordability Index is Worthless.” As you can see from the chart below, during the entire boom period of 1996-2006, there was but ONE MONTH where the NAR index said homes were not affordable. Indeed, that chart period extends from 1985 to 2008 — there was but a single month of over-priced houses.

How on earth did home prices NEVER become UNaffordable during the greatest run up in housing prices ever in the United States history? What sort of model refuses to allow homes to ever be perceived as unaffordable? We could only get that sort of thing from an industry source.

Gee, do you think their bias impacts their index?

Rather than rely on their silly, indefendable model, I suggest you compare median income to median home prices (see NDR chart below).

That metric shows that homes are way off of their boom highs, but stilll remain somewhat overvalued relative to the buyers ability to pay for that home. If you were to measure affordability BUT ignore that metric (of ability to pay), what you will end up with is lots of new homeowners who cannot afford to pay for those homes. Which in turn leads to lots of foreclosures — which is exactly what has occurred here.

By comparing Homes costs with buyers ability to pay for them, we can instead develop a sustainable model with periods of over and undervaluation — something the NAR model seems incapable of doing. That would render the NAR methodology, as a valuation measure, to be without any redeeming factors; (I believe the phrase I used in 2008 was “Worthless.”)

I would argue the measure of Median income to Median home price a much better gauge. It tracks people’s ability to pay for homes — an important data point if you want to see a measure of affordability that also imagines not being foreclosed upon is a relevant part of affordability.

Further, consider this perspective: How ownership ran up when money was free and lending standards had disappeared. That was obviously unsustainable. The latest home ownership data more likely reflects typical mean reversion to normalized ownership rates, rather than a paradigm shift in home ownership. At least, that is the my conclusion, relative to the ownership data and reversion to normal lending standards.

Of all the media outlets to get suckered by a garbage datapoint, one would think Bloomberg would be the last. Perhaps its time for Bloomberg LLC to offer a refresher class on “Understanding data for Journalists” . . .


Median Incomes vs Median Home Prices

NAR Affordability Index: Never Unaffordable


NAR Housing Affordability Index is Worthless (August 13th, 2008)

How to Read National Association of Realtors News Release (April 20th, 2011)

Americans Shun Cheapest Homes in 40 Years as Ownership Fades
Kathleen M. Howley
Bloomberg, April 19, 2011

Category: Real Estate, Really, really bad calls, Valuation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

37 Responses to “Cheapest Homes in 40 Years? Not Even Close…”

  1. Moss says:

    The ‘Ownership Society’ appears to be questioning the merits of such. Cheap is relative.. the masses do not want to take on the debt.

  2. Ben says:

    It’s not just Bloomberg that makes these mistakes. The WSJ has made the claim recently that affordability is the highest in 35 years:


    and here:


    The analysis came from Moody’s Analytics who generally do a pretty good job. They definitely got things wrong here however. The former article states that:

    “Nationally, the cost of a house is the equivalent of about 19 months of total pay for an average family, the lowest level in 35 years.”

    19 months….that seems a little off. It translates to a price-to-income ratio of 1.58.

  3. Bill Wilson says:

    I believe, they assume a 20% down payment as part of their model. Reducing the borrowed amount by 20% makes the mortgage more affordable. They don’t take into consideration the fact that it’s harder to save the 20% when prices are higher.


    BR: We discuss the details of the NAR model here.

  4. Mike in Nola says:


    The average ratio of home price to income is stated to be 3.5. However, was that number distorted by the cheap money and other shenanigans of the bubble era where income didn’t matter. Ignoring the bubble period and eyeballing it, it looks to be 3.1 or so.

    Are there any stats going back further?

  5. FNG says:

    Thanks for the excellent commentary regarding the current real estate misinformation out there. In the upstate NY area a lot of people are convinced that now is the time to buy Florida real estate. I am not so sure, so I appreciate your timely commentary.
    Also I caught your radio segment with Ratigan regarding “Dirty Money”. Excellent stuff! Not a fan of your CNBC stuff as I despise that outfit and fear you will become corrupted. For all of us common people….keep up the good fight!

  6. Jim67545 says:

    Interesting. I am surprised to see housing affordability decrease since the “end” of the recession. I thought median incomes were stagnant and housing prices down which should make housing more affordable not less so. This suggests that median incomes are not stagnant but are declining faster than the decline in the median value of homes. Is this conclusion true? What are the actual numbers?

  7. Kathleen M. Howley, as a “Journalist”, or, even, as an Educated Individual, may want to re-think her use of “cheapest” ..

    http://www.thefreedictionary.com/cheap def. #5

    Defective Construction Products…

    Building Industry Philosophy
    “Build homes cheaper, more spacious and grandiose, giving them the appearance of quality,” says Ahmad. “Build a house that is bigger than the buyer’s parent’s home. After all, air space doesn’t cost more when the land and materials are cheap and unsuitable for quality homebuilders.”


    then, seeing http://www.hobb.org/content/blogsection/1/197/ on HOAs, alone, We should wonder if ‘Homes’ are, really, at their ‘least expensive’ in 40 years..

    much to BR’s, previous, point, found (linked above) here .. NAR Housing Affordability Index is Worthless (August 13th, 2008)

  8. wally says:

    If it was that simple!
    Other factors that matter:
    -back in the 50′s, 60′s 70′s and into the early 80′d you could lock in a home price (ie: mortgage payment) expecting that your income would rise over the years but your payment would be fixed. Both those things went away sometime in the late 80′s.
    -Appreciating prices also mean appreciating equity, so even an ‘unaffordable’ home can be a money-making investment at some times. Unfortunately… not lately.
    -Price relative to construction costs matter.
    -Prices vary as the size and amenity level of homes varies. There are periods in recent history when the ‘overbuilding’ was the norm, measued by the living standards of othe generations.
    -A home is also tied into a whole system of utility distribution, transportation and property maintenance. Some homes – in fact, some whole eras of homebuilding – tie owners into cheaper or more expensive overall lifestyles. $5-per-gallon gas matter.

  9. rktbrkr says:

    Other trade groups have been missing the NAR bandwagon, we should be reading “lowest car prices in 50 years”, “best time to buy a washing machine in a generation” – who knows maybe it is.

    The reason we never see these misleading headlines spun by trade associations is that only homes are seen as investments, everything else is recognized as an expense, plain & simple. But homes, the structures themselves, depreciate and it’s the land value that appreciates based on scarcity especially in urban areas. Thats why Manhattan and San Fran RE defy gravity but Detroit and 50 mile out suburbs don’t, and why oceanfront FL condos have held up better than nice gated condos inland.

    Bottom line would be homebuyers need to filter out everything from NAR. In a sensible world NAR wouldn’t get a fraction of the attention that they get from MSM.

  10. dead hobo says:

    Damn, I was utterly convinced that housing would run up in value forever because they weren’t making any more land. Fortunately, I was already a homeowner at the time and never used my home as an ATM so being wrong wasn’t a big mistake.

    Fortunately, people who are own gold and are buying more as fast as they can don’t need to worry about that form of economics. Gold WILL go up forever because of a laundry list of reasons. All reasons to the contrary are just stupid from stupid people who don’t really understand how things work. Silver will do even better. It’s always best to follow the experts when gold is involved.

  11. aman86 says:

    Thanks Barry. My head almost exploded when I saw that article.

  12. BennyProfane says:

    Let’s not forget demographics. These aren’t “normal” times when 10,000 Boomers are turning 65 every day, for the next twenty years (that will be about 70 million at the end), and most, I dare say, would like to or must downsize. If anything, the executors of estates will be taking care of that sale if the seniors can’t/won’t move. But, who will buy these homes? A generation saddled with a trillion dollars of student debt and poor job prospects? The many immigrants who are denied entrance to the country?

  13. MattD says:

    Your index does pickup the downpayment element missing from NAR’s ( the entire price as a ratio of income) but it does not consider financing component, which the NAR index does include. People buy not only based on price but on monthly financing cost and, while NAR’s ‘user cost’ approach is very misleading, it does at least does try to address monthly cost. Yes, NAR distortions are revolting. But that does not mean the index itself is utterly useless.

    When journalists or popular blogs like yours write about the NAR index, perhaps it can be qualified since it will be with us for the foreseeable future; the NAR index might be more useful if the implied cost of the down payment were added , even if separately. And a warning about its use (will never happen from NAR ). For example, the P&I on a $200k mortgage is about$1200/month, and amounts to a $57.5 k household income if 25% PI (set aside TI for simplicity).

    At a 7% mortage rate, the household requires another $6300 of annual income to stay at a 25% ratio. Such exercises are relevant for people taking out hybrid ARMs or who want to know the financing cost if rates move higher and home prices go up or down. I hope people are smarter post bubble but who knows. And, who knows, maybe NAR will see how often its index is quoted with but with harsh embarrassing qualifiers and change their behavor (I know what a naif I am).

  14. Robespierre says:

    “Cheapest Homes in 40 Years? Not Even Close…”

    May be they are referring to this half?

    March Survey: Almost half of housing market is now distressed properties

  15. austextrader says:

    I think you are being too harsh on this indicator, especially about the charge of bias. This is a very simple quantitative indicator. I think your allegation would be more appropriate if they were constantly changing the calculation to make it look good. Most simple indicators do not capture any complex topic well, any good investor just has to understand what they mean. NAR could keep updating it to fit it better to reality but then you add a lot of subjectivity to the calculation. The 20% down payment probably was appropriate when the indicator was first constructed. I would agree with you if they have been constantly mucking with this thing to make it look better.
    I think the problem is not with the indicator but the journalists who cite this indicator without explaining what it conveys. Maybe it is time rename this indicator to “price of financing a median home” or something like that.


    BR: If you think any indicator that is incapable of showing homes overvalued for more than a month from 2001-2008 has any value, then go invest heavily in some real estate After all, ITS ALWAYS A GOOD TIME TO BUY OR SELL A HOME

  16. rob says:

    Tisk tisk Barry! Looks like you had a big bowl of cynical flakes this morning. ;) You’re assuming the lessons taught from “Understanding data for Journalists” haven’t been met. Class goals: Scour newswires for the most outlandish story that contradicts current public psychology. Then paste it if it agrees with wetware mandate for headline grabbing. Generate advertising dollars. Issue buried “correction” if necessary.

  17. rip says:

    Good analysis. Never knew NAR but NAHB. Opinion censored.

    There was a fascinating talk at TED a few years back about the current dilemma of McMansions requiring two incomes. And if…. Bad things happen. More kids grow up in families that have had to file bankruptcy than divorce.

    I can recall when a brick 1500 sf house was the norm. You could have a car a boat and a camper on one income.

    Not anymore.

    There is an economic and demographic shift going on that is going to force NAR to eat their words.

    @BR: LSS my suspicion is it’s even worse than you re painting it. But rent vs buy will remain as a choice point.

  18. Mr.Sparkle says:

    Very glad you chimed in on this. When I first read the article, I just laughed and shook my head.

    My only quibble with using median income vs. median home price is that I would think – though I have no sources to cite – that the half of households below the median are less likely to purchase a home. While I sincerely doubt that this makes up enough of a difference in bringing the NAR metric in line with reality, it’s another factor to consider.

    When did the entire financial press stop remembering the old loan officer’s Creditworthiness, Capacity, Collateral and Capital? Not just this article, but in discussions of debt in general? It’s like capacity doesn’t matter.

  19. austextrader:

    We could give that chart more value by raising the affordability line to say 120 — that way, you end up seeing periods of overvalued pricing.

    However, you still have the index in the hands of people who are not to be trusted.

  20. cognos says:

    People in the real estate industry tend to be morons. You are correct sir.

    But I have Wells Fargo showing a 3.125% 5-yr ARM mortgage… at 3.125% that 500k house with 400k mortgage costs about $1k/month to live in. (I figure the mortgage tax deduction about balances prop taxes and maint).

    That’s pretty damn affordable! (even more so considering prices are down by half!)

  21. MayorQuimby says:

    Once again – I have to emphasize that none of this accounts for cost of living relative to wages (ie food, gas, appliances etc.). I think that IF .gov maintains the strength of the US$ by cutting its budget – we will see prices bottom a good 15% – 25% lower. If bucky goes out the window – so does housing. Expect houses – especially rural – to essentially become nearly worthless due to energy and transportation costs.

  22. eliz says:

    Excellent piece. The NAR is (and has been for years) just another tentacle of the extend-and-pretend, deceitful, sociopathically greedy & self-serving, phantom FIRE economy.

    Caveat Emptor!

  23. DebbieSmith says:

    Here is a look at the most affordable housing markets in the United States and other countries when measured in terms of median household income:


    This measure could be significant in predicting which markets are severely unaffordable when compared to the household incomes of those living in that particular market.

  24. MayorQuimby says:

    My dream team of an economic team would be:



    Neither (fair):
    Calculated Risk

    No doves. I hate doves.

  25. Bill Wilson says:

    When you consider the current unemployment rate, I think it’s surprising the we are currently above the mean and not below.

  26. [...] Are houses cheap or not?  (Big Picture) [...]

  27. rfullem says:

    hello BR

    the link to the details of the NAR index did not work. Can you pleas resend? I have been wondering about this index ever since 2004 and noticed its averaged about 120. I was not sure if they weight it according to the type or mortgage one takes out (float vs fixed, length, etc.). I was amazed that, in Aug 2006, when it fell below 100 and nobody said a word. thanks

  28. socaljoe says:

    Most home buyer look at what monthly payment they can afford… not the cash price of the home. Now, think about what will happen to home prices if mortgage rates return to 8… 9… 10%.

  29. The California Association of Realtors had a home affordability index that showed something like 4% of homes affordable to the median income buyer in 2006… so they went and changed the index (higher DTI, variable ARM to lower interest rate, etc) to make homes appear more affordable. I think with all their playing with the numbers affordability went to something like 11%

    Also I think its a mistake to look at total housing price to total income as it ignores interest rates. You need to look at PITI vs income over the years as that is a much better picture of affordability. Also looking at an affordability index at a national level is stupid (the fact that the “All real estate is local” NAR conveniently doesnt mention that is the first warning sign) .. the high inventory foreclosure prone areas (arizona, nevada, florida, anything rust belt,etc) are cheap and that overwhelms the tighter markets like California, NY, etc.

    I prefer the NAHB HOI, even with its flaw of assuming 20% down. It breaks out affordability at the MSA level so you can cut through the national noise better. Back during the boom it showed 1.3% of homes in the Los Angeles MSA were affordable to the median income buyer, if you backed out the 20% assumption it was clear no median income family could afford a home using traditional financing.. and that was a fair picture of the market.

  30. [...] Cheapest Houses In 40 Years? Please. (But Check Out How The National Association Of REALTORS Just Fooled Bloomberg) [...]

  31. Is it too far afield to ask everyone’s opinion about “affordable” housing laws? Illinois, for instance, has a law requiring each city, town and village to provide “affordable” housing, with “affordable” based on AMI (area median income), along with median prices and rents.

    Chicago has no problem meeting the requirements, because it has both slum areas and upscale areas. So the “affordable” housing goes to the slums. But some upscale communities are quite uniform, and so are struggling to meet the requirements.

    I assume many other states have similar laws. Does anyone know, what have been the economic and social consequences of such laws?

    Rodger Malcolm Mitchell

  32. Sechel says:

    I can appreciate the attempt to put home prices in the context of median income, but wonder if this is
    the mirror side of valuing stocks in terms of current earnings after a period of prosperity
    . We are just coming out of recession, so it might be better to state in terms of a rolling average of earnings, or just view inflation adjusted real estate pricing.

  33. Ok…let’s just clear this up real quick. I have heard this 3.5 x median household income price average and I have heard the 3.0 x median household income = median home price…but I have never seen any data to suggest either one.

    I have seen 60 years of data that suggest that the average is much closer to 2.2. In fact, I wrote an short article on why home prices are still too high and included the data within my article. Please check out my article, and if you have the data that would suggest the average is closer to 3.5 or 3.1, please share it!!!


  34. bulfinch says:

    @ Cognos: Your math is…whack.

  35. [...] I’m getting bullish on? Home Prices Still Too Expensive?Yesterday I came across a post at The Big Picture that said home prices are still way too expensive. The rationale was that median home prices [...]

  36. cognos says:

    Bulfinch -

    How is my math “whack”?

    400k @ 3.125% = 12k per year in tax deductible interest. Maybe payments of a bit more than this… 15k.

    This is $1,200 per month to own a $500k home. Very cheap.

    NEVER take the 30-yr. Always take the 5/1 ARM. Saves you big.

  37. kidelectric says:

    What’s wrong with your math, cognos?

    How about this: “tax deductible interest” does not mean you get all of that interest back in your taxes! Closer to about 1/4 of it actually comes to you back due to the deduction (it varies slightly, but when I calculated my own case for a potential house purchase, I would be getting back 28% of the extra interest I would be spending)