A growing number of reports are pointing out the concerns surrounding diminishing affordability, however a new report from Trulia says housing is actually more affordable now than it was 40 years ago.
In its latest Mortgage Monitor report, Black Knight explained mortgage rates and home prices pushed affordability to its lowest point since 2009.
Or take this study from GOBankingRates, which shows even the most affordable housing markets still aren’t very affordable.
But Trulia’s new study shows while it may be tempting to think previous generations had it easier, housing is actually more affordable now than it was 40 years ago.
The company constructed an affordability score, comparing the highest price the median household could afford with median actual home prices in each year. A household’s highest affordable price is its maximum buying power, with a 20% mortgage down payment. An affordability score of 100 means that the affordable and actual prices are exactly the same; a score of 100 or higher means housing is affordable, and under 100 means it is not affordable.
The study showed that nationally, homes are the most affordable they’ve been in the last 40 years, and the median household could afford a home 1.5 times more expensive than the median home price.
However, in 1980, the median household could only afford about 75% of the median home price.
Over the past 40 years, income growth has been outpaced by home price growth at increases of 27% versus 63%, respectively. But while home prices have far outpaced incomes, buying a home has become more affordable due to low interest rates, which went from a high of more than 16% in 1980 to less than 4% in 2016.
Trulia explained that growth in home prices alone does not tend to have much affect on affordability.
“Recent record-low mortgage rates have created a buffer of affordability that have kept homes in most metros attainable – and at least has pulled in the reins on unaffordability in the nation’s priciest metros,” Trulia said in its report.
Mortgage rates would need to increase to 9.4% before the median home becomes unaffordable nationally, at today’s income levels.
Of course, being able to afford a median priced home, and finding one are two different things. Last year, housing inventory tumbled to an all-new low with shortages especially difficult in the starter home market.
Also, the report assumes a 20% down payment. While home prices 40 years ago may have made this a more attainable task, in today’s market, 20% down can easily mean forking over $50,000 or more. Many buyers choose to go with a mortgage program that allows them to put less down, however it increases monthly payments through adding mortgage insurance, therefore decreasing affordability.