Andrew Davidson & Co., Inc. (AD&Co), a New York-based provider of mortgage analytics and consulting services, today announced the publication of a new research paper in the Quantitative Perspectives series, "Measuring Housing Affordability and Home Price Equilibrium: Revisiting the Housing Bubble & Bust and HPI Modeling" by Andrew Davidson and Alexander Levin.
This paper shows that housing affordability has not changed significantly despite the large drop in home prices and all-time low mortgage interest rates. Affordability measures that account for financing terms such as loan-to-value (LTV) and loan pricing relative to credit cost, show that borrowers continue to pay approximately the same fraction of their incomes toward mortgages now as they did during the peak of the housing bubble.
These new findings support the theory that mortgage rates themselves are not as strong a determinant of housing prices as some economists have suggested. This approach also helps explain the pricing of homes during the housing bubble.
"Home affordability needs to be considered in light of the full financing package. It needs to include the cost of down payment and the pricing of credit risk, in addition to mortgage interest rate. During the bubble the low all-in cost of mortgage financing allowed borrowers to purchase homes, even at inflated home prices," said Andrew Davidson, President of AD&Co, about the results of the analysis.
Alex Levin added, "Among other things, our work explains the often misunderstood role of interest rates in home-price modeling. The insights from this paper will be incorporated into the third generation of AD&Co's home price index generator (HPI3). The net effect will be to reduce interest-rate sensitivity, but increase the focus on mortgage financing terms."