In this episode of The REconomy Podcast™, Chief Economist Mark Fleming and Deputy Chief Economist Odeta Kushi tackle a common misconception that housing has never been more unaffordable. Sharing the results from their proprietary analysis, they explain how tracking nominal house prices alone fails to capture the impact of shifts in house-buying power. Their conversation highlights how affordability has changed over generations and identifies which generation faced the steepest affordability challenges.
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"Nominal prices are only one part of the affordability story. A home's sticker price doesn't tell us what a household could actually afford at the time. For that, we need to account for house-buying power, which depends on income and mortgage rates." — Odeta Kushi, deputy chief economist at First American
Odeta Kushi - Hello and welcome to episode 141 of The REconomy Podcast, where we discuss economic issues that impact real estate, housing, and affordability. I'm Odeta Kushi, deputy chief economist at First American, and here with me is Mark Fleming, chief economist at First American.
Mark, today we're going to talk about two of your favorite topics: measuring affordability and the 1980s. Now that I say it out loud, it sounds pretty sad that those are two of your favorite topics, but...
Mark Fleming - I mean, two of my favorite things, affordability math and the 1980s, all in one episode. Come on, I feel like I've been training for this, for 140 REconomy episodes, to be exact.
Odeta Kushi - Yeah, that's a lot of episodes. And I figured you'd be excited about this topic.
Mark Fleming - Indeed. You know, these are a few of my favorite things. Yes, I know, Sound of Music, wrong decade, but don't worry listeners, we'll get there.
Odeta Kushi - We will get there. Way off, but a nice reference nonetheless, and now it's stuck in my head. Now, today's question is one that sounds pretty simple, but gets complicated pretty quickly. Was housing actually more affordable in the past than it is today?
Mark Fleming - Hmm, a dangerous question at a dinner party, I suspect.
Odeta Kushi - I know. I've been stuck in one or two conversations about who had it worse. Because I think often the instinctive answer is yes. People look at home prices from decades ago and say, how could it not have been easier? Homes were so much cheaper.
Mark Fleming - Exactly. Yeah, in nominal terms, they absolutely were. So, I think we need to explain a little bit here. Nominal in economics means the value of something unadjusted for inflation or changes in buying power. And, if you do adjust for buying power, then the value is referred to as real instead of nominal, portending that which is about to come.
Odeta Kushi - Exactly. Nominal prices are only one part of the affordability story. A home's sticker price doesn't tell us what a household could actually afford at the time. For that, we need to account for house-buying power, which depends on income and mortgage rates.
Mark Fleming - And voila, this is where the Real — get it, Real — House Price Index comes in. We're not done yet.
Odeta Kushi - Getting real fast, real quick. We're not done, unfortunately, for you listeners. Our Real House Price Index, or RHPI, adjusts nominal house prices for changes in house-buying power. So, instead of asking only how much did the home cost, we're asking how expensive was that home relative to what buyers could afford.
Mark Fleming - A much, much better question to ask.
Odeta Kushi - I think so, because when you look at it that way, the picture can change pretty dramatically. Take 1981, since I know you enjoy any chance to revisit the 1980s.
Mark Fleming - The era of cassette tapes, leg warmers, and mortgage rates that make today's look mild by comparison.
Odeta Kushi - For what it's worth, I had a cassette tape or two in the ‘90s. But I digress. In 1981, the median new home price was about $69,000. To a buyer today, that sounds almost unbelievable. That might be a down payment in today's market.
Mark Fleming - A down payment, or in some markets, just a kitchen renovation or a bathroom renovation at best.
Odeta Kushi - But the mortgage rate environment was completely different. Rates were in the high teens, so household purchasing power was much lower. When we translate 1981 housing conditions into today's dollars using that RHPI framework, that $69,000 home would feel roughly like $604,000 in today's market.
Mark Fleming - So, that home was cheaper in nominal dollars, but once we account for purchasing power, the real price was much less affordable.
Odeta Kushi - That's right, and that's the key point. Lower nominal prices in the past did not necessarily mean better affordability. What mattered was how those prices lined up with what households could afford.
Mark Fleming - That's the important distinction, and why we built the Real House Price Index, or RHPI. Because we often compare generations using nominal prices alone, but the financial reality facing buyers depends on income, mortgage rates, and prices all together.
Odeta Kushi - That's why we find this analysis useful. It translates past housing market conditions into today's dollars, showing just how expensive a home would feel given the house buying power that buyers had at the time.
Mark Fleming - So it's not nostalgia economics — wait, nostalgia economics. Did I just invent a new economic discipline?
Odeta Kushi - No, though I do appreciate the phrase. It's a way to put different time periods on a more comparable footing, if you will.
Mark Fleming - And it gives us a more honest way to talk about affordability across generations: baby boomers, Generation X, and millennials, in particular. Similar to a recent Wall Street Journal analysis, we recently looked at the periods when each generation made up some or all of the typical first-time home buyer age group, which is roughly 25 to 34. The idea is not that everyone buys between 25 and 34, but that this window captures a period when many households begin forming strong ties to homes or seriously considering homeownership.
Odeta Kushi - Exactly. So, for baby boomers, the window spans from the ‘70s through the late ‘90s. For Gen X, it runs from the early ‘90s through the mid-2000s. Millennials began entering that age range in the mid-2000s and continue through today.
Mark Fleming - And each of those periods had a very different affordability environment.
Odeta Kushi - Very different indeed. Many baby boomers entered the housing market when mortgage rates were elevated, especially in the late ‘70s and early 1980s, and maybe "elevated" isn't doing it justice — rates were peaking above 18%. Gen X moved through their early home-buying years during the housing boom of the mid-2000s and then lost some of their equity in the Global Financial Crisis. Millennials entered the housing market during the post-Great Financial Crisis recovery and then faced the pandemic-era housing boom and then the sharp increase in mortgage rates.
Mark Fleming - So the generational story is really, I couldn't resist it, a timing story.
Odeta Kushi - Yeah, listeners, I apologize again. It's not just about which generation you belong to. It's about the mix of mortgage rates, income growth, and nominal house prices you faced when you were ready to buy.
Mark Fleming - Which explains why experiences can differ even within the same generation.
Odeta Kushi - Yes, older and younger members of the same generation may have entered the market under very different conditions. Older baby boomers faced the late 1970s and early ‘80s, younger boomers entered later under different conditions, and so on.
Mark Fleming - I'm going to resist making The Breakfast Club joke here about generational labels. I'm so good at restraining myself.
Odeta Kushi - I appreciate your restraint. Very kind of you. Now we can't live in the past for the entire episode, much as we may want to, because we have to move on. So, let's get into more current affordability dynamics. Housing affordability improved meaningfully over the past year. In February, according to our Real House Price Index report, we showed that affordability improved nearly 9 to 11 percent compared to a year ago.
Mark Fleming - Why not? It's the ‘80s! Okay, okay. And that is a sizable improvement, but I feel like there's a but here somewhere. I mean, there's always a but, right?
Odeta Kushi - Well, it is a sizable improvement, and actually no but this time around. It was pretty broad based. All of the top 100 markets we track posted year-over-year affordability gains, and that's the first time all 100 markets have done that since October 2024.
Mark Fleming - Certainly good news, and that tells us the improvement wasn't just concentrated in a few markets, it was widespread. So far, so good.
Odeta Kushi - Yes, and the improvement reflects all three major pieces of the affordability equation moving in a more favorable direction. Mortgage rates, while they remain elevated compared to recent historical averages, were lower than a year ago. Incomes continue to grow, and nominal house price appreciation moderated, with some markets even posting price declines, and importantly, incomes outpaced house price growth.
Mark Fleming - Yes, a very important distinction we've talked about before. But, to be clear, the February First American Data and Analytics house price index shows nominal prices remain near a historic high, just 0.2% below the peak reached in January. So, if you only look at nominal prices, the market still looks very expensive, even if the growth rate has slowed.
Odeta Kushi - The classic levels versus growth rates distinction. Now, we do have to talk a little bit about mortgage rates. If you were to look for a but, this would probably be where you'd find it, because buyers and sellers alike are very focused on mortgage rates, and understandably so. Even small changes in rates can make a big difference in monthly payments.
Mark Fleming - And you know, rates have been volatile recently. Maybe that's a little bit of an understatement. It's a bit like The Empire Strikes Back: just when you think conditions are improving, mortgage rates remind you who's really in control.
Odeta Kushi - Okay, so let me get this straight. In this version, the Empire is borrowing costs?
Mark Fleming - Yeah, sure. And now why am I envisioning the Fed chair in a Darth Vader outfit? There we go.
Odeta Kushi - Well, now I am too. So, we'll go with that. Now, we've seen renewed mortgage rate volatility tied, in part, to inflation concerns, energy prices, and broader macroeconomic uncertainty. Mortgage rates follow the 10-year Treasury yield closely, and the 10-year yield responds to expectations about inflation, growth, and Fed policy.
Mark Fleming - And energy price shocks can matter because they feed into those inflation expectations.
Odeta Kushi - Now, if energy prices spike temporarily, markets may be able to look through it. But, if energy prices remain elevated long enough to affect broader inflation expectations, that can put upward pressure on Treasury yields and, in turn, mortgage rates.
Mark Fleming - So for affordability, the key here is persistence. It's persistence that matters.
Odeta Kushi - Right. A brief bout of volatility may not fundamentally change our affordability outlook, but if rates move higher and stay higher, that can quickly reduce house-buying power.
Mark Fleming - But, and this is a good one, if income growth continues, that can offset some of the pressure.
Odeta Kushi - Ever the optimist. Which brings us back to why affordability is not just a mortgage rate story. Rates do matter a lot, but so do incomes and prices. If income growth remains strong and house price appreciation stays moderate, affordability can continue to improve, even if rates remain elevated. And by that we really mean sort of consistently elevated rather than moving higher, because that would be a different picture.
Mark Fleming - About where they are. Yes. So, what really matters, yes, I had to say it, is the interaction of the three.
Odeta Kushi - But, yes, it's always about the interaction of these forces.
Mark Fleming - I think we should put it on a mug. Everyone has a coffee mug. Let's put it on a mug.
Odeta Kushi - Only if we also make one that says, "Mark mentioned the 1980s again."
Mark Fleming - That would definitely sell. Dare I say it might even go viral.
Odeta Kushi - It's getting to his head. Now, before we build a whole REconomy merch store, let's move on quickly to the local market story, because national affordability improved, but not every market improved for the same reason or by the same amount.
Mark Fleming - I don't see the problem with that. I feel like you are really working hard to keep me on track in this episode. Housing is local, after all.
Odeta Kushi - I'm already exhausted. Yes, mortgage rates are broadly national, but local home price trends and local income growth vary. That's why affordability can improve more quickly in some markets than others. In the latest data, the largest affordability improvements were in markets like Cape Coral, Florida, Seattle, Sarasota, Florida, and Tampa, Florida. In places like Cape Coral, house prices have declined by nearly 9% on a year-over-year basis, while income growth has been roughly flat. Meanwhile, in Seattle, house prices have declined by only about 2%.
But, income growth has been strong. Meanwhile, in places like Allentown, Pennsylvania and Poughkeepsie, New York, annual affordability improvements were about 1%, so slower affordability growth compared to those Florida markets, because income growth has been flat, while house price growth has actually been strong, above 7%. So, again, it's the interaction that matters.
Mark Fleming - Continued income growth, stable or lower mortgage rates, and moderate house price appreciation. Those are the three ingredients. If incomes keep rising and prices remain relatively stable, affordability can keep improving. If mortgage rates fall, of course that would help more. But, if rates rise, or stay the same because inflation concerns intensify, or if price growth accelerates again, then affordability could go the other way and begin to deteriorate.
Odeta Kushi - But any affordability improvements will be gradual. It's not The Matrix, where we unplug and wake up in 2019 affordability conditions.
Mark Fleming - Nicely done. A 1999 reference to an excellent movie. Respect.
Odeta Kushi - I had to get it in right at the end. Now, I'm going to take the win and stop here. But first, just the final takeaway: affordability did improve on a year-over-year basis and that improvement was broad based. This is great news. But understanding affordability requires looking beyond price levels alone, and that's what this episode is really about. When you factor in house-buying power, the past looks different, the present looks more nuanced, and generational comparisons become less about simple labels and more about the conditions buyers faced when they entered the market.
Mark Fleming - Well said. Lower prices in the past didn't always mean easier affordability, and higher prices today don't always tell the whole story either.
Odeta Kushi - Exactly. It's really all about price level relative to purchasing power. And thank you all for joining us on this episode of The REconomy Podcast. If you have an economics-related question you'd like us to feature in the future, you can email us at economics@firstam.com. And, as always, if you can't wait for the next episode, you can subscribe to our Econ Center at firstam.com/economics or connect with us on LinkedIn. Until next time.
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This transcript has been edited for clarity.