The housing market is feeling the squeeze as high prices, low inventory, and high demand all butt up against each other, making it difficult for many potential homebuyers to find a house of their own (or at least one they can afford). But is affordability really so dire in the grand, historic scheme of things? Trulia recently did some research and discovers that, given the right context, homes might not be so unaffordable after all.
In order to get a better sense of things, Trulia created an affordability score that compares the highest price the median household in a market can afford with median actual home prices in each year. The highest affordable price assumes a standard 20 percent down payment. If the affordability score is 100, that means the “affordable and actual prices are exactly the same,” so anything over 100 means housing is affordable; a score below 100 means it is not. As Trulia puts it, “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.
Comparing current affordability scores to those of various past years, Trulia came to a surprising conclusion: nationally, homes are actually more affordable than is generally assumed. As Trulia reports, 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 three-quarters of the median home price.
Between 1980 and 2016, Trulia found that 22 metros had shifted from “unaffordable” status to “affordable.” Moreover, of the 100 largest metros, only Miami trended from affordability into unaffordability during that period.
However, it isn’t all good news. During that same period from 1980 to 2016, incomes have grown by 27 percent (adjusted for inflation). Home prices, on the other hand? Those have grown a whopping 62 percent. Nevertheless, affordability has actually been on the rise over the past several decades, owing largely to the decrease in mortgage rates. In 1980, they were over 16 percent. In 2016? Under four percent.
What does that mean in terms of dollars and cents? In 1981, Trulia found that the median home price was $136,156. However, the median income could only afford a home that cost $97,832. Trulia concluded that changes in mortgage rates had historically had a far larger impact on affordability than home prices did. If current mortgage rates were to hit their 1980 levels, “the median household would go from being able to afford a $312,653 home to a $144,805 home.” That’s a 54 percent decrease in affordability driven by only a ten percent increase in mortgage rates.
You can read Trulia’s full affordability report by clicking here.