Is homeownership actually more affordable now than ever before?

[anni]

Hello friends. Please forgive my parading my ignorance around these parts so much lately, real estate's been on my mind a lot as my lease is coming up in a couple months (and my rental could reasonably be sold out from under me thanks to this bananas market). In a recent thread I asked about feelings, but now I want to talk about math.

A DC friend shared this reddit thread today about the DC housing market and I've been puzzling over these comments:

$750k @ 2.25% = $2867/mo

$650k @ 4% = $3103/mo

this is why people are paying so much more, when that rate goes back up it's going to kill prices, but you'll still be paying more per month

right, when the news keeps repeating "historically low rates" for months on end it sort of loses its impact.  but even 4% is historically a really good rate.  2.25% is as someone else said essentially nothing when you adjust for inflation.

for fun assuming a $250k house in 1980 (which is probably going to be a somewhat nicer house than $741k today) gains 30% value per decade, mostly from inflation.  There were several months in the early 80s where the rate was in the 17-18% range, which is closer to your default rate on a credit card when you miss a payment than to even regular credit card rates, let alone mortgages today.

Jan 1980 - $250k @ 12.9%  = $2746/mo ($8,827/month adjusted for inflation!)

Jan 1990 - $325k @ 9.9% = $2828/mo ($5,731/month adjusted for inflation)

Jan 2000 - $422.5k @ 8.4% = $3219/mo ($4,951/month adjusted for inflation)

Jan 2010 - $549,250 @ 5.0% = $2948/mo ($3,581/month adjusted for inflation)

Jan 2020 - $714,025 @ 3.6% = $3246/mo ($3,322/month adjusted for inflation)

today - $741,667 @ 2.8% = $3047/mo

​

so even though our price of the house has tripled, adjusted for inflation we pay less per month than any other time in the past 40 years (except the recent dip that bottomed out 2.68% in Dec 2020)

There's more discussion on the thread, arguing both that housing has appreciated way more than that and that rates aren't actually that low, both of which I think just depend. My brain hurts! I never took macroeconomics....

Two questions:
1. These numbers still don't much help first time home buyers who are trying to save up a down payment, but if rates go up and payments go up, then the new bottleneck is monthly wages instead of purchase prices. So who or what ultimately influences this call? Does it historically change based on government intervention, mostly?
2. These numbers also suggest that any meaningful increase in mortgage rates is going to automatically hurt home values and send any buyers from this ~3% interest rate golden age underwater? That might be a little extreme and not applicable to all markets, but if that did happen, would it even really matter (except for lost down payments) if buying a new place was super cheap anyways?

[MrMoneySaver]

That is all way above my pay grade. However, I do want to add that taxes and insurance will be higher on a higher-priced property. So those calculations are incomplete at best.

[Abe]

None of these numbers are adjusted for things like #bedrooms, square feet, etc. Also affordability is dependent on how much money can be spent (by definition), so the monthly costs (and property taxes, that also aren't included) should be compared to median income in the area. If that % of median income is lower than before, then technically it is more affordable for people in that area. This ignores gentrification and rise of median income because poor people are pushed out as rents go up.

So yes, the interest rates are much lower, but there are a lot of other factors that go into affordability.

Regarding your two questions:
1. Mortgage rates roughly follow trends in the treasury bond interest rates, which is the floor on rates (otherwise lenders would just buy treasury bonds instead - much safer). They are generally a few points higher to compensate for risk from default, and also somewhat dependent on what the US government is willing to back (most mortgages are backed by US semi-governmental agencies FNMA and FMDC, which are in turn bailed out by the federal government). Interest rates historically have decreased but are unlikely to go much lower due than they are now due to default risks.

2. Going underwater depends on the amount of principal paid already vs. amount owed on the house. Interest rates themselves are only indirectly related because affordability is again dependent on a lot of other factors. Also, a lot of house mortgages are being refinanced, so those would likely not go underwater regardless (since a lot of equity has already been achieved from payments before refinancing - a requirement for refinancing in most cases). It would only matter if you are trying to sell a house and can't sell it at the price you paid minus what you've already paid in principal. Then you as the seller have to make up the difference to your mortgage lender when the house is sold. All of that is contingent on actually selling, so if you're not planning to sell then "water level" doesn't matter. If you are unable to pay the mortgage anymore, then the bank would declare you in default and sell the house at an auction to recover value it can (a short sale). In the end, risk of being underwater mostly affects people who over-extended to buy an expensive house and then have to sell a few years afterwards after a crash. Avoid buying too big a house for your income and that is unlikely to be a concern.

In general your theory is correct, but all the additional factors make it less clear-cut. Historically, massive defaults have been due to over-extension on the part of home-buyers, not directly due to interest rate fluctuations or  home values (though people are more likely to over-extend if they think they're getting a good "deal").

[Paper Chaser]

The inflation adjusted monthly payment only matters if other costs like taxes/insurance have been constant, and incomes have seen the same increases as housing. That doesn't seem to be the case. This article on housing "affordability" was posted in another recent thread and kind of overlooked, but it's got some interesting points/data:

https://www.supermoney.com/inflation-adjusted-home-prices/

[iris lily]

You young whipper snappers can’t even understand mortgage rates of 14%! Yes, that was real back when I was thinking about buying a first house.

Recently I did a back-of the-envelope analysis of the pay today for the job I had back then, figured out which property I would buy in that same locale, and how much I would pay for it today.

It seems to be slightly cheaper today than it was 40 years ago.

 

[FrugalToque]

You young whipper snappers can’t even understand mortgage rates of 14%! Yes, that was real back when I was thinking about buying a first house.

Truth.  My parents were able to save some money back then by investing in "mortgage corporations" that slightly undercut the bank mortgage rates.

[MrMoneySaver]

Does anyone get the sense that because of the current mania, a lot of people are trying to unload properties that would normally be hard to sell? Maybe they have water issues, are built on poor topography, are near a railroad, or whatever. And people will buy them for a decent price anyway.

[MudPuppy]

I think the real question with affordability would be comparing those mortgage numbers against similar calculations concerning incomes and cost of living over a similar time frame.

I’m not personally interested in doing the math, but I would lean to stagnant or somewhat less affordable than previously.

[iris lily]

Does anyone get the sense that because of the current mania, a lot of people are trying to unload properties that would normally be hard to sell? Maybe they have water issues, are built on poor topography, are near a railroad, or whatever. And people will buy them for a decent price anyway.

yes, I am seeing properties that have been on and off the market for years, suddenly sell in the past 6 months.

[Paper Chaser]

I got curious and ran some numbers based on median values for home price, 30 year mortgage rates, and household income per FRED:

https://fred.stlouisfed.org/series/MSPUS
https://fred.stlouisfed.org/series/MORTGAGE30US
https://fred.stlouisfed.org/series/MEHOINUSA672N

For transparency and a more valid comparison I used the earliest values available for a given year, and assumed 20% down payment since low down payments are a fairly recent option. The mortgage numbers were run through google's mortgage calculator to get monthly P/I based on a loan for 80% of purchase price and the interest rate in early January of each year.

1980- selling price was 63700, mortgage rate was 12.9%, and income was 21k. That spits out a Principal/interest payment of $557/mo or 32% of monthly income. Median selling price was 3 times median income.

1990- Selling price was 123900, mortgage rate was 9.8%, income was 57k. Monthly P/I was $854, or 17.9% monthly income. Median selling price was 2.17 times median income.

2000- Selling price was 165300, mortgage rate was 8.1%, income was 62,500. Monthly P/I was $978, or 18.8% monthly income. Median selling price was 2.64 times median income.

2010- Selling price was 222900, mortgage rate was 5.1%, income was 57,900. Monthly P/I was $969, or 20% monthly income. Median selling prices was 3.85 times median income.

2020- Selling price was 329000, mortgage rate was 3.6%, income was 69,000 (guessing slightly higher than 2019). Monthly P/I was $1196, or 20.8% of monthly income. Median selling price was 4.76 times median income.


Caveats:
-This is only the Principal and interest of the mortgage, so does not include insurance or property taxes.
-Real estate costs and incomes are both highly variable by location, so using a national median might not represent a given location very well.
-Mortgage rates can vary based on credit rating, etc
-Those making lower down payments would be paying more in P/I each month than my calculations, plus have the added cost of PMI. So a 5% down buyer in 2020 would actually be spending $1418/mo on P/I which is 24.6% monthly income, plus PMI and other associated costs.

Conclusions:
-incomes nearly tripled between 1980 and 1990, and interest rates dropped which resulted in 1990 being a great year to buy, even with what we'd consider to be a really high interest rate today.
-general trends since 1990 have resulted in increasingly worse price:income ratio and increasing % of monthly income needed for housing each decade.

[ender]

It'd also be interesting to look at that per square foot @Paper Chaser as I think that would show a different story too.

[Jon Bon]

It'd also be interesting to look at that per square foot @Paper Chaser as I think that would show a different story too.

House are pretty hard to compare across time. Inflation generally can be accounted for. However it reminds me of the problem of comparing cars over time. Yes a 2021 car is going to be more expensive overall than a 1980 car. But it is going to be much nicer, safer, and fuel efficient.

Houses you also have to take into account location. No one is building in the nice close in areas anymore, obviously no space left. Lots of different variables for sure.

As for the general statement, yes I agree that houses are still pretty affordable (entirely due to rock bottom interest rates)

[Paper Chaser]

It'd also be interesting to look at that per square foot @Paper Chaser as I think that would show a different story too.

It would be interesting. But I'm struggling to find a single data set that covers $/sqft for the 40 year period used as an example, and the few snippets that I have found only cover new builds rather than all homes sold. We know that homes constructed recently are generally larger than homes constructed several decades ago but that's about all we know. As Jon Bon pointed out, the cities were mostly fully developed when new homes were smaller, and land is more expensive in these places so I think it's natural to see smaller footprints there. Most new builds can be larger because the land is cheaper in the locations where new builds are occurring. This graphic comes from the supermoney link I posted earlier:

[paideuma]

Does anyone get the sense that because of the current mania, a lot of people are trying to unload properties that would normally be hard to sell? Maybe they have water issues, are built on poor topography, are near a railroad, or whatever. And people will buy them for a decent price anyway.

yes, I am seeing properties that have been on and off the market for years, suddenly sell in the past 6 months.

Yep - I've been looking at buying for over a year now, paying close attention whats selling and I've seen lots of houses go for above (an already inflated) asking price, in flood plains, power lines in the backyard, on busy streets/back up to highways, etc. I guess there are desperate buyers out there, and lots of people thinking short term "I need to buy now!!!". Interested to see if/how this changes a year from now, a bit further removed from the pandemic.

[SwordGuy]

Does anyone get the sense that because of the current mania, a lot of people are trying to unload properties that would normally be hard to sell? Maybe they have water issues, are built on poor topography, are near a railroad, or whatever. And people will buy them for a decent price anyway.

yes, I am seeing properties that have been on and off the market for years, suddenly sell in the past 6 months.

Yep - I've been looking at buying for over a year now, paying close attention whats selling and I've seen lots of houses go for above (an already inflated) asking price, in flood plains, power lines in the backyard, on busy streets/back up to highways, etc. I guess there are desperate buyers out there, and lots of people thinking short term "I need to buy now!!!". Interested to see if/how this changes a year from now, a bit further removed from the pandemic.

When the home prices sag back to normal, those folks won't be able to sell when they need to, and then we'll hear moans of despair and cries of "How could I have known?!".

[clarkfan1979]

This is more a local example, but I would argue that housing is very cheap for me right now.

I closed on a 280K home in November 2019 in Pueblo West, CO. It's a 1998 ranch with a finished basement. A contractor flipped it and it's turn key. Median house price for the neighborhood was 240K at the time, but that's going to be a house with no updates since the late 1990's and maybe a partially finished basement. People in the neighborhood thought I get ripped off at a 280K sale price, but it was actually a good deal, in my opinion. It's 5 bed/3 bath and 2450 sq. ft. total. It's 1250 sq. ft. upstairs and 1200 sq. ft. downstairs. The garage is oversized (22 ft. wide by 27 ft. long). The lot is .28 acres with a shed in the backyard. New roof in 2019.

I refinanced in December 2020 and I got 2.875%. My PITI right now is $1156/month. Property taxes are going up in a few months for the schools, which is a good thing. I think it will adjust to around $1190/month total. I also have $400/month going toward principle.

I think $1190/month is pretty cheap for a 5 bed/3 bath and 2450 sq. ft. It's totally finished with no updates needed.

[Le Poisson]

It'd also be interesting to look at that per square foot @Paper Chaser as I think that would show a different story too.

It would be interesting. But I'm struggling to find a single data set that covers $/sqft for the 40 year period used as an example, and the few snippets that I have found only cover new builds rather than all homes sold. We know that homes constructed recently are generally larger than homes constructed several decades ago but that's about all we know. As Jon Bon pointed out, the cities were mostly fully developed when new homes were smaller, and land is more expensive in these places so I think it's natural to see smaller footprints there. Most new builds can be larger because the land is cheaper in the locations where new builds are occurring. This graphic comes from the supermoney link I posted earlier:

I think it's an impossible ask just because floorplans and feature creep in housing is uncomparable. If you had told my mother in 1980 that she would see granite countertops in production homes she would have laughed at you.

The notion of pillars and hardwood and all these things are so... priviledged? and yet realtors and buyers EXPECT it now - the the point that affordable homes are refit with these features to ensure competitiveness in resale. In 1990 I got a house with an air exchanger as the height of technology. I sat with my dad and read the manual because we had no idea how it worked or what it did.

If you built a home today with carpet and linoleum floors, with laminated countertops and home-built or sitebuilt plywood cupboards, if you knocked it down to 1500 or less SF, and it had an unheated garage and a wood clapboard exterior, you would be competing with the resale house market of 1980-something. And it would be a pretty normal mid-grade home built 20 years earlier. But you won't even find that on the market today. And all those upgrades carry both a cost to the installer and value to the buyer. I'm not saying they are all better - but I am saying they push prices outside normal inflation.

[norajean]

Stock market has more than tripled in the past 10 years, which has floated a lot of boats higher.  Inflation has been low.  Home prices have not yet regained 2006 levels, when adjusted for inflation.

[waltworks]

Stock market has more than tripled in the past 10 years, which has floated a lot of boats higher.  Inflation has been low.  Home prices have not yet regained 2006 levels, when adjusted for inflation.

No, nationally they are a bit above those levels in real terms, actually (and Case Schiller data lags by a few months). Composite20 was a few ticks below that bubble high as of January but is probably above it now.

This assumes you're using CPI less housing for your inflation number.

https://www.calculatedriskblog.com/2021/03/real-house-prices-and-price-to-rent.html

-W

[clifp]

I got curious and ran some numbers based on median values for home price, 30 year mortgage rates, and household income per FRED:

https://fred.stlouisfed.org/series/MSPUS
https://fred.stlouisfed.org/series/MORTGAGE30US
https://fred.stlouisfed.org/series/MEHOINUSA672N

For transparency and a more valid comparison I used the earliest values available for a given year, and assumed 20% down payment since low down payments are a fairly recent option. The mortgage numbers were run through google's mortgage calculator to get monthly P/I based on a loan for 80% of purchase price and the interest rate in early January of each year.

1980- selling price was 63700, mortgage rate was 12.9%, and income was 21k. That spits out a Principal/interest payment of $557/mo or 32% of monthly income. Median selling price was 3 times median income.

1990- Selling price was 123900, mortgage rate was 9.8%, income was 57k. Monthly P/I was $854, or 17.9% monthly income. Median selling price was 2.17 times median income.

2000- Selling price was 165300, mortgage rate was 8.1%, income was 62,500. Monthly P/I was $978, or 18.8% monthly income. Median selling price was 2.64 times median income.

2010- Selling price was 222900, mortgage rate was 5.1%, income was 57,900. Monthly P/I was $969, or 20% monthly income. Median selling prices was 3.85 times median income.

2020- Selling price was 329000, mortgage rate was 3.6%, income was 69,000 (guessing slightly higher than 2019). Monthly P/I was $1196, or 20.8% of monthly income. Median selling price was 4.76 times median income.




Conclusions:
-incomes nearly tripled between 1980 and 1990, and interest rates dropped which resulted in 1990 being a great year to buy, even with what we'd consider to be a really high interest rate today.
-general trends since 1990 have resulted in increasingly worse price:income ratio and increasing % of monthly income needed for housing each decade.

Terrific analysis.  From my perspective as someone who's bought a home in every decade since 1980. I'd say house are lot more affordable now than they were back in the 1980s, my 13.75% mortgage with increasing payments each year for the first 5 years, consumed 35% of my and college roommates incomes.  The banks figured as young engineers in Silicon Valley our income would go up, but it was a scary proposition.  I add argue the drop from 32% in the 80s to the ~20% from the 1990s on is a lot more significant than few percent increase.

Plus I do want to point at house are absolutely affordable in many places.   I bought a house for $27,000 last week near KC, MO. Is it someplace I want to live in, hell no, and you can't get a mortgage for under $50k.  But after spending $20-25K rehabbing it we will probably put it on the market for $70k and I will probably be as nice as any place I lived before 2000.
It was built in 1930 and is 800 square feet but that's a common size back then.  Not much bigger than today's tiny houses.

So not only are new houses bigger, but they are much nicer in virtually all respects, and a lot safer. Its one of the reasons that my homeowner's policy is roughly twice as much as it was in 1983, despite the house being worth 8 times more.

[PMJL34]

For everyone commenting that houses are cheaper today. It's because (you and I) are older and we are just relatively rich so it's easier for us personally to buy a house compared to when we were younger.

Every statistical measure states that it is harder to purchase a house today than it was in the past. Imagine being a first time buyer and trying to buy a house now. It ain't happening without some serious compromises. Today, more than ever, homes are viewed as investments. This coupled with limited supply makes it near impossible for first time buyers.

[Paper Chaser]

For everyone commenting that houses are cheaper today. It's because (you and I) are older and we are just relatively rich so it's easier for us personally to buy a house compared to when we were younger.

Every statistical measure states that it is harder to purchase a house today than it was in the past. Imagine being a first time buyer and trying to buy a house now. It ain't happening without some serious compromises. Today, more than ever, homes are viewed as investments. This coupled with limited supply makes it near impossible for first time buyers.

"Cheaper today" is pretty ambiguous. Cheaper than 1980? Yeah, perhaps in a vacuum where things like insurance costs and student loan debt were much lower. Cheaper than 1990 or 2000 or 2010? Nope. The general trend is that homes have gotten more expensive over the last 30 years. Even with decreasing interest rates intended to offset purchase prices, homes continue to take up a larger percentage of monthly income and continue to outpace median household incomes. And that's just the median. For expensive places, the numbers are even worse.

Real Estate is so location dependent. With you being in the Bay Area, you're seeing much higher median incomes, but also much higher housing costs than cheaper places. Things aren't quite as dire in most of the country. Prices are still climbing excessively, but the ratio of income to pruchase price in your location should not be considered "the norm".

According to the Census bureau, the median income in the San Fran metro is $60k per capita and $114,600 household. The median value of an owner occupied housing unit is $940,900. That's 8.2 X the median household income for the area (which itself is much higher than the national median income).

https://censusreporter.org/profiles/31000US41860-san-francisco-oakland-berkeley-ca-metro-area/


If we use the same site to compare it to a popular, booming mid-sized city like Nashville, TN, Columbus, OH, or Charlotte, NC the level of affordability increases significantly.

Nashville: Per capita income- $37,700 Household income- $70,300 Home value-$285,100 or 4.0 X the median household income

Columbus: Per capita income- $36,300 Household income- $67,200 Home value- $212,600 or 3.16 X the median household income

Charlotte: Per capita income- $36,400 Household income- $66,400 Home value- $233,900 or 3.5 X the median household income

These cities have museums, night life, sports teams, quality restaurants, good schools, etc. While incomes may be lower in these places, costs are low enough to more than offset that difference.