The chart above is updated from a previous post and shows one measure of housing affordability over time by displaying the monthly mortgage payments (adjusted for inflation in 2012 dollars) for a median-priced new home (Census data here) financed at the prevailing 30-year mortgage rate in each month back to January 1978, assuming a 20% down payment. Payments for a $246,200 median-price new home purchased in November with a 20% down payment and a 3.35% fixed-rate 30-year mortgage would be $868.03. Average monthly mortgage payments have been at or below $900 for the last 16 months starting in August 2011, and the November payment is about 34% below the average of $1,321 per month over the last 33 years.
The incredible housing affordability today is a major factor in the home sales rebound over the last year, as buyers take advantage of low home prices and low mortgage rates. The incredible affordability of housing has to counteract and offset some of the “gloom and doom” about younger generations being worse off than their parents, stagnating income, increasing income inequality, the necessity of a dual-earner household to survive financially and the dangers of inflation. For example, consider that for several years in the early 1980s, monthly mortgage payments were above $2,000 (in today’s dollars) and the average monthly mortgage payment for the decade of the 1980s was $1,634 (in 2012 dollars), almost double the average payment in November of $868. On an annual basis, the increased housing affordability today translates into more than $9,000 in savings compared to the 1980s, which is the same as a $9,000 average increase in household income. In the 1990s, the average monthly mortgage payment was $1,224, or $356 higher than today’s average monthly payment. Today’s lower payments would translate into annual savings of $4,200 in housing costs compared to the average mortgage payments of the 1990s.
The chart below shows how the inflation-adjusted monthly mortgage payment measure of housing affordability for a median-priced new home above compares to the National Association of Realtors’ Housing Affordability Index (inverted) from January 1981 to November 2012. Except for a period in the late 1980s, the two measures of housing affordability track very closely over time, and the correlation coefficient between the two series is 91%.
MP: By either measure, housing affordability today is at its highest level in more than a generation, going back to at least the 1970s. When it comes to buying a home, young first-time home buyers today are much better off than their parents, grand-parents or great-grand parents. Considering today’s home prices and mortgage rates, there’s probably never been a better time to buy a home than today, especially for first-time home buyers. A year from now, home prices will likely be 5-10% higher and mortgage rates will likely rise from their historic low levels, and I’m confident that a year from now, or five years from now, we’ll look back on the 2012-2013 period as the peak of housing affordability.