There are many headlines about how housing affordability is
declining. The headlines are correct: it’s less affordable to purchase a home
today than it was a year ago. However, it’s important to give this trend
context. Is it less expensive to buy a house today than it was in 2005? What
about 1995? What happens if we go all the way back to 1985? Or even 1975?
Obviously, the price of a home has appreciated dramatically
over the last 45 years. So have the prices of milk, bread, and just about every
other consumable. Prices rise over time – we know it as inflation.
However, when we look at housing, price is just one
component that makes up the monthly cost of the home. Another key factor is the
mortgage rate at the time of purchase.
Let’s look back at the cost of a home over the last five
decades and adjust it for inflation by converting that cost to 2021 dollars.
Here’s the methodology for each data point of the table below:
Mortgage Amount: Take the median sales price at the
end of the second quarter of each year as reported by the Fed and assume that
the buyer made a 10% down payment.
Mortgage Rate: Look at the monthly 30-year fixed rate
for June of that year as reported by Freddie Mac.
P&I: Use a mortgage calculator to determine the
monthly principal and interest on the loan.
In 2021 Dollars: Use an inflation calculator to
determine what each payment would be when adjusted for inflation. Green means
the homes were less expensive than today. Red means they were more expensive.
As the chart shows, when adjusted for inflation, there were
only two times in the last 45 years that it was less expensive to own a home
than it is today.
Last year: Prices saw strong appreciation over the last
year and mortgage rates have remained relatively flat. Therefore, affordability
2010: Home values plummeted after the housing crash
15 years ago. One-third of all sales were distressed properties (foreclosures
or short sales). They sold at major discounts and negatively impacted the value
of surrounding homes – of course homes were more affordable then.
At every other point, even in 1975, it was more expensive
to buy a home than it is today.
If you want to buy a home, don’t let the headlines about
affordability discourage you. You can’t get the deal your friend got last year,
but you will get a better deal than your parents did 20 years ago and your
grandparents did 40 years ago.