Are Houses Less Affordable Than They Were in Past Decades?

<article class="post-4430 post type-post status-publish format-standard has-post-thumbnail hentry" id="post-4430"><span class="entry-date">August 11, 2021</span><div class="entry-header center-block text-center"><h1 class="entry-title">Are Houses Less Affordable Than They Were in Past Decades?</h1><div class="shareBlock"><div class="shareTitle">Share</div><div class="shareIcons"><a aria-label="Twitter Share Link" class="twitter solid display-inline-block" data-tracking="Post,Social Post Link Clicked,Twitter" href="http://twitter.com/share?text=Are+Houses+Less+Affordable+Than+They+Were+in+Past+Decades%3F&amp;url=https%3A%2F%2Fgilliggroup.com%2Fblog%2Fare-houses-less-affordable-than-they-were-in-past-decades%2F" target="_blank"><span class="force-hidden">Twitter</span></a>
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<p><img alt="Are Houses Less Affordable Than They Were in Past Decades? | Simplifying The Market" class="webfeedsFeaturedVisual wp-post-image" decoding="async" link_thumbnail="" loading="lazy" sizes="auto, (max-width: 549px) 100vw, 549px" src="https://files.simplifyingthemarket.com/wp-content/uploads/2021/08/10163257/20210811-KCM-Share-549×300.jpg" srcset="https://files.simplifyingthemarket.com/wp-content/uploads/2021/08/10163257/20210811-KCM-Share-549×300.jpg 549w, https://files.simplifyingthemarket.com/wp-content/uploads/2021/08/10163257/20210811-KCM-Share.jpg 750w" style="display: block; margin-bottom: 5px; clear:both;max-width: 100%;" width="358"/></p>
<p>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?<span id="more-44928"></span></p>
<p>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. <em>Prices rise over time</em> – we know it as <strong>inflation</strong>.</p>
<p>However, when we look at housing, <strong>price</strong> is just one component that makes up the monthly <strong>cost</strong> of the home. Another key factor is the mortgage rate at the time of purchase.</p>
<p>Let’s look back at the <strong>cost</strong> 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:</p>
<ul>
<li>
<strong>Mortgage Amount</strong>: Take the median sales price at the end of the second quarter of each year <a href="https://fred.stlouisfed.org/series/MSPUS">as reported by the Fed</a> and assume that the buyer made a 10% down payment.</li>
<li>
<strong>Mortgage Rate</strong>: Look at the monthly 30-year fixed rate for June of that year <a href="http://www.freddiemac.com/pmms/pmms30.html">as reported by Freddie Mac</a>.</li>
<li>
<strong>P&amp;I</strong>: Use a mortgage calculator to determine the monthly principal and interest on the loan.</li>
<li>
<strong>In 2021 Dollars</strong>: Use an <a href="https://www.usinflationcalculator.com/">inflation calculator</a> to determine what each payment would be when adjusted for inflation. Green means the homes were <strong>less expensive than today</strong>. Red means they were <strong>more expensive</strong>.</li>
</ul>
<p><a href="https://files.simplifyingthemarket.com/wp-content/uploads/2021/08/10163259/20210811-MEM-Eng-1.png"><img alt="Are Houses Less Affordable Than They Were in Past Decades? | Simplifying The Market" class="aligncenter wp-image-44930" decoding="async" height="488" loading="lazy" sizes="auto, (max-width: 650px) 100vw, 650px" src="https://files.simplifyingthemarket.com/wp-content/uploads/2021/08/10163259/20210811-MEM-Eng-1.png" srcset="https://files.simplifyingthemarket.com/wp-content/uploads/2021/08/10163259/20210811-MEM-Eng-1.png 1000w, https://files.simplifyingthemarket.com/wp-content/uploads/2021/08/10163259/20210811-MEM-Eng-1-400×300.png 400w" width="650"/></a><strong>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.</strong></p>
<ol>
<li>
<strong>Last year</strong>: Prices saw strong appreciation over the last year and mortgage rates have remained relatively flat. Therefore, affordability weakened.</li>
<li>
<strong>2010</strong>: 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 – <em>of course</em> homes were more affordable then.</li>
</ol>
<p>At every other point, even in 1975, <strong>it was more expensive to buy a home than it is today</strong>.</p>
<h3><strong>Bottom Line</strong></h3>
<p>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.</p>
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