Affordability is a function of incomes, mortgage rates, and home prices. From these, one can calculate the average monthly mortgage payment of the average household and that payment’s percentage of monthly household income.
At the peak in the housing bubble in 2006, the median home price in the U.S. reached $230,300 with 30-year fixed mortgage rates at 6.76%, assuming a 20% down payment. The monthly payment for that mortgage was $1,196 or 29.8% of the $4,071 in monthly income that a household with two working persons generates at the median.
Today housing prices are up over 53% with a median home price of $353,900, but household income is up 40% and mortgage rates are cut in half at 3.07%. That implies a $1,204 monthly payment, 21.4% of today’s median monthly income of $5,627. Mortgage rates would have to almost double to revert to 2006 affordability.
Long story short, housing affordability is still higher than historical averages of the 1980s and 1990s (28.1% of monthly income), when mortgage rates were much higher.
Excerpt from Barrons.com, written by Ken Shinoda
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