Are Houses Less Affordable Than They Were in Past Decades?

There’s no denying that houses are less affordable today than a year ago. Recent headlines emphasize the rising costs of homeownership, but it’s essential to view this trend in context.

How does today’s affordability compare to past decades? Was it easier to purchase a home in 2005, 1995, or even 1975? Analyzing historical data helps us understand how affordability has evolved and what it signifies for buyers in today’s market.

Home Prices Rise Over Time

The price of a home has appreciated dramatically over the last 45 years. So have the prices of milk, bread, and almost every other consumable. Prices rise over time – we know it as inflation.

However, when we consider housing, price is just one component of the monthly cost. Another key 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 what each payment would be when adjusted for inflation. Green means the homes were less expensive than today. Red means they were more expensive.

(See Graph)

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.

1. Last year: Prices saw strong appreciation over the last year and mortgage rates have remained relatively flat. Therefore, affordability weakened.
2. 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 major 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.

Bottom Line.

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 with real estate experts at KM Realty Group LLC, Chicago you will get a better deal than your parents did 20 years ago and your grandparents did 40 years ago.