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 essential 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 back to 1985? Or even 1975?
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 critical 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 each payment 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, it was only two times in the last 45 years that it was less expensive to own a home than today.
- Last year: Prices saw strong appreciation over the last year, and mortgage rates have remained relatively flat. Therefore, affordability weakened.
- 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 significant 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.