The steady decline of purchasing power

[Kevin Jorgensen]

Home Chair Market Analyst here. I thought I"d play around with some of the data out there to get an idea if I should buy now or later. 

Mortgage rates have done an admiral job of staving off the pain of ever increasing house prices, but they can only go so far, and they already are at record lows.

Without an economic collapse, I don't see house prices reversing trend.

Higher rates will likely slow the economy, but not collapse it.

I've always thought that the purchasing power was the key metric when considering to buy or not. But the majority of opinions I see tend to be around Mortgage Price or Mortgage Rate. 

I'm defining purchasing power as the percentage of Median Income that a Median Mortgage would cost. 

I took data from October 2016 back to 1984 (no particular reason on that date) to look at the trend and correlations. (FRED Economic Research site)

Correlations were (for those unfamiliar perfect correlations are either +1 or -1, a 0 being no correlation):

- Mortgage Rate to % Median Income = -.55 (Moderate)

- House Price to Mortgage Rate = -.89 (Strong)

- House Price to % Median Income = .84 (Strong)

- Monthly Mortgage to % Median Income = .98 (almost perfect)

This chart is not inflation adjusted, but does give a sense of when would have been a good time to buy versus not if you go by the variance from the trendline. 06-07 = worst on chart, '11 = pretty darn good. 

Here we have the nice correlation of Mortgage rates and % Median income, but there is some discrepancy. You can see the spike in house prices (third graph) in 2007 were much more influential on the % Median Income than the Mortgage Rate.

Here we can see the median home price against the paltry rise in the median income.