Affordability is about as good as it has ever been, at
least based on this metric.
n n n
As outlined previously, the home-price-to-income and
mortgage-payment-to-income ratios do seem to indicate that housing is not overvalued today, especially
considering the ratios are lower today than during the
bubble years. The biggest issue facing the housing
market now is the lack of inventory, which is feeding
the huge imbalance between supply and demand.
That is not necessarily an indicator of an over-priced
and/or unaffordable market.
The affordability issue will only get worse, however,
as prices and interest rates move upward, so waiting
to purchase a home until housing becomes more
affordable may mean prospective buyers will miss
out on a once-in-a-generation wealth-building op-
portunity. Share that outlook with first-time home-
buyers whose bubble worries have kept them on the
fence with respect to pursuing a home purchase. n
home prices are a touch over their historical highs,
the increase in median incomes makes homes more
affordable now than they were during the housing
bubble, which is good news for originators and pro-
Looking at home prices versus incomes is better than
looking at home prices in a vacuum, but there is still
something missing: interest rates. As any car dealer
will tell you, people don’t necessarily buy based on the
sticker price. They buy based on the monthly payment.
Similarly, the determining factor for housing affordability is the mortgage payment, which is determined
by home prices plus interest rates.
The principal and interest payment on that home
with a median value of $232,000 from 2016 using a
30-year fixed interest rate of 4. 16 — the rate at the
end of 2016 — would be $913 a month, assuming a
20 percent downpayment. The first year’s payments
would total roughly $11,000, or about 18. 6 percent of
the 2016 median income, with $7,700 of those payments going to interest and $3,200 to principal.
At the peak of the bubble, annual principal and
interest payments accounted for 24. 4 percent of
median income, and it was much higher in the early
1980s, when interest rates were pushing 17 percent.
Back then, principal and interest payments consumed
48 percent of median incomes, and 99 of a borrower’s
first-year payments went to paying interest. Compare
that to today’s levels, where it is closer to 70 percent.
Historically, homeowners rarely built up much equity
in the first few years of owning a house. They were
lucky if they built enough equity to cover their closing
costs if they had to move within a couple of years.
Now, homeowners can begin building equity — and
wealth — immediately. This can be a powerful message
for renters, who are not building any equity.
To put these numbers into historical perspective,
since 1975 the annual principal and interest payment
on a home of median value has averaged about 26 percent of median income, with a maximum of 48 percent
in 1981 and a minimum of 15 percent in 2011 and 2012.
At the end of 2016, it stood at 18. 6 percent.
By the monthly payment metric, housing affordability is just off the highs. Homes were at their cheapest in
a generation around 2012, but they are still extremely
affordable today compared to historical averages,
even though home prices are now above the bubble
peaks. Even without the tax effects of the mortgage-interest deduction, the conclusion remains the same:
<< Overpriced continued from Page 122 “Homes were at their cheapest in a
generation around 2012, but they
are still extremely affordable today
compared to historical averages.”