Home prices are more affordable now than they've been since the mid-1980s and even large interest rate hikes may only moderately increase the cost of housing, according to a federal reserve bank's recent take on the housing market.

Today, it takes less than 16 percent of the median household income to pay a mortgage on a median priced home, compared to more than 20 percent in the mid-1980s and around 18 percent just prior to 1990, according to "Explaining Recent Changes In Home Prices," an analysis of home affordability just published in the Federal Reserve Bank of Chicago's July 2005 "Chicago Fed Letter."

The report's author, senior economist and economic advisor Richard Rosen, examined Chicago area homes prices, incomes and mortgage rates and explains that record low interest rates and higher incomes more than offset rising home prices.

"These two factors (low mortgage rates and higher incomes) have kept housing affordability for the United States as a whole roughly constant as housing prices have increased," he wrote.

Taking some of the air out of housing market bubble warnings that the housing market is over inflated and poised to pop (like a bubble) and push prices down, the four-page report comes on the heels of Federal Reserve Chairman Alan Greenspan's contrary comments after a recent speech for the Economic Club of New York.

"There are a few things that suggest, at a minimum, there's a little froth in this market ... we don't perceive that there is a national bubble ... it's hard not to see that there are a lot of local bubbles," Greenspan said in response to a question following a prepared speech.

Greenspan wasn't just talking about tiny bubbles that make you feel happy. There is growing evidence those local bubbles are becoming more like a regional foam. A Federal Deposit Insurance Corporation report in early May said a record 55 housing boom markets, 72 percent more than 22 just two years ago, could cause a bust much bigger than a mere froth forecast would suggest. That's especially true in large regions where boom markets are concentrated -- California and the West, New England and the Northeast, and Florida.

Rosen says even if mortgage rates rise "housing prices in the country as a whole, as well as in the Seventh District, may stabilize or fall slightly. If housing affordability remains roughly constant, any decline in prices is likely to be moderate. Even if mortgage rates rise to 7.5 percent, well above their 5.8 percent average for 2004, housing prices in most markets are likely to remain at or above their 2000 levels."

That's in line with earlier comments by Greenspan who has held that any decrease in home prices has never matched the preceding increase.

At the Economic Club, Greenspan did voice concern about the growing number of housing market speculators and other borrowers reaching, perhaps beyond their means, to purchase homes using adjustable-rate mortgages (ARMs) and interest-only loans to make houses more affordable.

Rosen concedes his analysis focused not on the nation's most expensive housing markets, but on home buying in the Chicago area and buyers using only traditional fixed rate mortgages and 20 percent down payments. Rosen agrees those who use ARMs and interest-only loans may be more vulnerable to price drops, however moderate.

"There may be trends in housing prices for particular segments of the market that are missed by this analysis. If rates continue to rise, these borrowers may feel the pressure to sell more than those with traditional mortgages," Rosen said.

"In addition, as Federal Reserve Chairman Alan Greenspan noted in a recent speech, there has been an increase in the share of homes purchased for investment. Again, speculators may be quicker to sell if house prices start to weaken. This could put additional downward pressure on prices in some markets," Rosen added.

Published: June 1, 2005

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Broderick Perkins parlayed a career in old-school journalism into a contemporary digital news service that really hits home. The award-winning consumer journalist, originally from Wilmington, DE, is founder, publisher and executive editor of the bootstrap DeadlineNews Group, a Silicon Valley-based editorial content and consulting service specializing in residential real estate, consumer news and related editorial consulting services. The DeadlineNews Group includes the website, DeadlineNews.com, offering real estate editorial content and consulting services, and its back shop, the Deadline Newsroom, an open house on news that really hits home. Perkins obtained his formal journalism education from University of Delaware and a journalism boot camp, the Institute of Journalism Education at the University of California-Berkeley. He went on to 20 years of service as a daily newspaper journalist at the Wilmington, DE News Journal and San Jose, CA Mercury News. Perkins covered housing on the San Jose Mercury News reporting team which earned a General News Reporting Pulitzer Prize in 1989 for coverage of the Loma Prieta earthquake. He has also produced real estate, consumer and small business content for the Wall Street Journal, Los Angeles Times, RealtyTimes.com, Nolo.com, Better Homes and Gardens, the National Association of Realtors, Homestore/Move and Intuit/Quicken among more than three dozen publications. In addition to managing the DeadlineNews Group, Perkins most recently served as chief editorial consultant for Nolo's Essential Guide To Buying Your First Home, Nolo, and writes real estate television scripts for RealtyTimes.com.