Last week, Realratemortgages launched two new indexes. The Real Housing Affordability Index and the Real Income to Price Index.

In a previous post, I showed the difference between the initial and the average loan payment to income ratios (25.8% vs. 9.6%) between 1980 and 2011. I showed that, due to level-payment mortgages referenced to nominal interest rates, borrowers could start paying 25.8% (or more) of their income and end up devoting less than 5%. The average, according to the Federal Reserve, is 9.6%, but this figure is not telling us the real financial effort. It is not the same, from a financial point of view, to start paying 25 and end up paying 5, than always paying 9.6 or start paying 5 and end up devoting 25. We need to homogenize data with the Net Present Value of the stream of payments.

The Real Housing Income to Price Index gives an homogeneous data of the real financial effort to buy a house and the Real Housing Affordability Index to pay back a 30-year mortgage loan (See methodology). In order to homogenize the data, the indexes only take into account the evolution of real interest yields, but consider a constant term (30 years) and Loan to Value ratio (80%).

The Real Housing Affordability Index shows that the average real loan payment between 1998 and 2010 was 14.6%. Although the figure comes from an index, it is consistent with the analyzed market data, because one could reasonably expect a figure between 25.8% and 9.6%.

In a previous post, I showed the difference between the initial and the average loan payment to income ratios (25.8% vs. 9.6%) between 1980 and 2011. I showed that, due to level-payment mortgages referenced to nominal interest rates, borrowers could start paying 25.8% (or more) of their income and end up devoting less than 5%. The average, according to the Federal Reserve, is 9.6%, but this figure is not telling us the real financial effort. It is not the same, from a financial point of view, to start paying 25 and end up paying 5, than always paying 9.6 or start paying 5 and end up devoting 25. We need to homogenize data with the Net Present Value of the stream of payments.

The Real Housing Income to Price Index gives an homogeneous data of the real financial effort to buy a house and the Real Housing Affordability Index to pay back a 30-year mortgage loan (See methodology). In order to homogenize the data, the indexes only take into account the evolution of real interest yields, but consider a constant term (30 years) and Loan to Value ratio (80%).

The Real Housing Affordability Index shows that the average real loan payment between 1998 and 2010 was 14.6%. Although the figure comes from an index, it is consistent with the analyzed market data, because one could reasonably expect a figure between 25.8% and 9.6%.