The other day, I looked at

Price/Rent ratios over time in various cities. In Dallas and Atlanta, by this measure, prices have been relatively similar in 1998, 2006, and 2019, but they were extremely low in 2013. Other cities I looked at were more mixed. Prices looked high in 2006, and generally looked higher in 2019 than they had in 1998 or 2013.

Here, I will look at the same cities, in the same way, but here, I am looking at mortgage payments/rent payments, which is another way to think about affordability.

A couple of caveats:

1) Here I am using the 30 year conventional mortgage rate, but I am applying it to a 100% loan-to-value. I know that's not realistic as a mortgage product, but it's a way to get at the relative value here. I don't want to give the buyer a 20% advantage just by assuming a down payment, but my point here isn't particularly to look at mortgages with higher spreads. In any case, it is the relative values over time that are informative, so this shouldn't matter that much.

2) All data is from Zillow. (Zillow rocks.) But, they only have rents back to 2010, so 1998 and 2006 are estimated rents based on metro area level affordability measures and prices. It probably doesn't matter that much for 2006, but 1998 might be taken with a few grains of salt.

Looked at in terms of mortgage payment/rent payment for a house at a given price level, housing affordability for buyers is well below levels of 1998 and 2006. For instance, in Atlanta, in 1998 or 2006, the mortgage payment on a $160,000 house would have been similar to the rent payment. In 2013 and 2019, the mortgage payment on a $160,000 house would be about 60% of the rental payment.

By this measure, even in 1998, mortgage affordability would have been pretty good. Price/rent was near long term lows and mortgage rates had been high since the 1970s. By this measure, home prices are well below historical norms, and for buyers of those homes, there is little interest rate risk, because the homes are already priced at a discount when taking interest rates into account.

People who are complaining that loosening lending standards will push prices up to levels that hurt affordability have a (somewhat) plausible point. But, this measure is why I think that they are applying that point at a standard that reflects their own preference for tight lending more than it reflects a half century of American homebuying norms.

Also, of course, it is noteworthy that from 1998 to 2006, mortgage affordability improved in Dallas and Atlanta. That's what an elastic housing supply does for you. On the other hand, in this measure, it was only the high end of Dallas and Atlanta that became more affordable. One could argue that this is a sign of loose lending. On a Price/Rent ratio level, prices in Dallas and Atlanta rose fairly proportionately. But, if we think of Rent/Price as a sort of yield on housing, the yield is higher on low end homes, which means that their prices should be less sensitive to changing risk-free rates. (Going from 9% to 8% has less of an effect on price than going from 4% to 3%.) So, prices should rise less because of falling risk-free yields in low tier homes than in high tier homes. If these estimates are accurate, though, it appears that low tier prices in those cities were more sensitive to changing interest rates, so that falling rates increased prices as much as they decreased the mortgage payment. (Although, keep in mind, the 1998 data I am estimating here wouldn't be dependable at that level of granularity.)

Here is San Francisco, too.

One interesting pattern here is that mortgage/rent ratios are pretty similar in every city. For instance, a $160,000 home in every city would have a mortgage/rent ratio of somewhere around 50-60%..That's the case from Dallas to San Francisco. Of course, there aren't many $160,000 homes in San Francisco. But, the pattern is curious.