Living in Colorado

When it comes to buying a home, Americans have been feeling the crunch in recent years. Demand is high, inventory is low, and prices continue to rise. These pressures have created a perfect storm for prospective buyers – they now need to pay more for a home, and will likely have a hard time finding that home.

In today’s squeezed environment, it can feel like the going is tougher than ever before – certainly, tougher than our parents had it. But were the good old days really that good? Trulia took a look at home affordability across the decades to try to answer this question.

They constructed an affordability score, comparing the highest price the median household could afford with median actual home prices in each year. A household’s highest affordable price is its maximum buying power, with a 20% mortgage down payment. An affordability score of 100 means that the affordable and actual prices are exactly the same; a score of 100 or higher means housing is affordable, and under 100 means it is not affordable. In other words, an affordable market is one in which the median household income’s buying power meets or exceeds the median home price – even if prices are high, if household incomes are high enough to cover that price, then the market is considered affordable.

Using this score, they were able to determine whether housing was affordable (i.e., whether the affordability score was above 100), and how affordable housing was, compared to previous years (i.e., how much the affordability score changed).

Trulia found that:

• Nationally, homes are just about the most affordable they’ve been in the last 40 years. In 2016, the median household could afford a home 1.5 times more expensive than the median home price. In 1980, the median household could only afford about 3/4 of the median home price.
• At the same time, income growth has been outpaced by home price growth. Adjusting for inflation, incomes have grown 27% between 1980 and 2016, while home prices have grown 62%.
• Despite relatively stagnant incomes, affordability has grown due to the sharp drop in mortgage rates over the last 30 years – from a high of over 16% in the 1980s to under 4% by 2016.
• Of the nation’s 100 largest metros, only Miami became unaffordable between 1990 and 2016. Meanwhile, 22 metros have flipped from being unaffordable to becoming affordable in that same time frame.

How much “house” you can afford depends on how your income stacks up against prevailing home prices – but mortgage rates are an X factor that homebuyers can’t control. Mortgage rates determine the size of a household’s mortgage payments– and in turn, how far their incomes can go.

It’s not your father’s housing market, at least regarding mortgage rates – and that’s a good thing. In the 1980s, the country was experiencing massive inflation. The Federal Reserve responded by driving up interest rates, which in turn led to mortgage rates in the sustained double digits, up to 16.6% in 1981. In that year, the median home price was $136,156, while the median income could only afford a home price of $97,832. In subsequent recessions–from the mild slowdowns in the early 1990s and 2000s, to the Great Recession in the mid 2000s—inflation was kept in check, and mortgage rates tended to shrink in tandem with the economy. Even in recent periods of economic expansion, such as the years following 2009, the mortgage rate continued its downward trajectory, from 5% in 2009 to less than 4% in 2016.

Turns out, changes in mortgage rates affected affordability over the years much more than changes in prices or income. If 1980’s mortgage rate came back, the median household would go from being able to afford a $312,653 home to a $144,805 home. In other words, a roughly 10% increase in mortgage rates would lead to a decrease in the affordable price by 54%.

Read the rest of Trulia's research.