In recent weeks much has been written about the rising cost of U.S. housing. According to Reuters News Agency, the “rising cost of steel, lumber and copper is hampering homebuilding—and pushing house prices out of reach.” In that vein, we explore the affordability of U.S. housing between 1980 and 2020, using time prices, which measure the amount of time that an American blue-collar worker needs to work to earn enough money to buy a house.
According to the U.S. Census Bureau, the median sales price of a house in the U.S. in 1980 was $64,600. Given that the mortgage loan rate at that time was 13.74%, a 30-year loan for $64,600 required a monthly payment of $752.15. The average size of an American home was 1,595 square feet, indicating a monthly payment rate of $0.47 per square foot of housing.
According to Measuring Worth, a well-known database run by economist Lawrence H. Officer of the University of Illinois at Chicago and economist Samuel H. Williamson of Miami University, the average blue-collar worker’s compensation rate was $9.12 per hour. Therefore, a $752.15 loan payment required 82.47 hours of work per month, which is equal to a monthly payment rate of 3.1 minutes of work per square foot of housing.
By 2020, the median sales price of a house rose to $336,900. The mortgage loan interest rate, however, declined to 3.11%. A 30-year loan, then, required a monthly payment of $1,440.45. The average U.S. home size also increased to 2,261 square feet, indicating a monthly payment rate of $0.64 per square foot of housing.
In 2020, the average blue-collar worker’s hourly compensation rate stood at $32.54. Therefore, a $1,440.45 loan payment required 44.27 hours of work per month, which is equal to a monthly payment rate of 1.17 minutes of work per square foot of housing.
That means that the time price of a loan payment decreased from 82.47 hours of work per month in 1980 to 44.27 hours of work per month in 2020, or by 46.3%. Over the same period, the time price of a monthly loan payment per square foot of housing decreased from 3.1 minutes of work to 1.17 minutes of work, or by 62.1%.
Between 1980 and 2020, the nominal price of a square foot of housing increased by 268%. Over the same period, the average nominal blue-collar hourly compensation rate rose by 257%. As such, the time price of a square foot of housing rose from 4.44 hours of work in 1980 to 4.58 hours of work in 2020, or 3.1%.
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The last year has put emphasis on the importance of one’s Boston home. As a result, some renters are making the jump from Beacon Hill apartment renters into Beacon Hill and Boston condo buyers while some homeowners are re-evaluating their current downtown Boston living plans and considering a move to one that better fits their current lifestyle. Understanding how housing affordability works and the main market factors that impact it may help those who are ready to buy a home narrow down the optimal window of time in which to make a purchase.
There are three main factors that go into determining how affordable homes are for buyers:
- Mortgage Rates
- Mortgage Payments as a Percentage of Income
- Home Prices
The National Association of Realtors (NAR) produces a Housing Affordability Index. It takes these three factors into account and determines an overall affordability score for housing. According to NAR, the index:
“…measures whether or not a typical family earns enough income to qualify for a mortgage loan on a typical home at the national and regional levels based on the most recent price and income data.”
Their methodology states:
“To interpret the indices, a value of 100 means that a family with the median income has exactly enough income to qualify for a mortgage on a median-priced home. An index above 100 signifies that family earning the median income has more than enough income to qualify for a mortgage loan on a median-priced home, assuming a 20 percent down payment.”
So, the higher the index, the more affordable it is to purchase a home. Here’s a graph of the index going back to 1990:The blue bar represents today’s affordability. We can see that Boston real estate for sale is more affordable now than they’ve been at any point since the housing crash when distressed properties (foreclosures and short sales) dominated the market. Those properties were sold at large discounts not seen before in the housing market for almost one hundred years.
Although there are three factors that drive the overall equation, the one that’s playing the largest part in today’s homebuying affordability is historically low mortgage rates. Based on this primary factor, we can see that it’s more affordable to buy a home today than at any time in the last eight years.
If you’re considering purchasing your first home or moving up to the one you’ve always hoped for, it’s important to understand how affordability plays into the overall cost of your home. With that in mind, buying while mortgage rates are as low as they are now may save you quite a bit of money over the life of your home loan.
If you feel ready to buy, purchasing a home this summer may save you a significant amount of money over time based on historical affordability trends. Let’s connect today to determine if now is the right time for you to make your move.
There’s a current narrative that owning a Boston home today is less affordable than it has been in the past. The reason some are making this claim is because Midtown condo prices have substantially increased over the last several years.
It’s not, however, just the price of a home that matters.
Homes, in most cases, are purchased with a mortgage. The current mortgage rate is a major component of the affordability equation. Mortgage rates have fallen by over a full percentage point since December 2018. Another major piece of the affordability equation is a buyer’s income. The median family income has risen by approximately 3% over the last year.
The National Association of Realtors (NAR) releases a monthly Housing Affordability Index. The latest index shows that Boston condo affordability is better today than at almost any point over the last 30 years. The index determines how affordable homes are based on the following:
“A Home Affordability Index value of 100 means that a family with the median income has exactly enough income to qualify for a mortgage on a median-priced home. An index of 120 signifies that a family earning the median income has 20 percent more than the level of income needed pay the mortgage on a median-priced home, assuming a 20 percent down payment so that the monthly payment and interest will not exceed 25 percent of this level of income (qualifying income).”
The higher the index, therefore, the more affordable homes are. Here is a graph showing the index since 1990:Obviously, affordability was better during the housing crash when distressed properties – foreclosures and short sales – sold at major discounts (2009-2015). Outside of that period, however, Beacon Hill homes are more affordable today than any other year since 1990, except for 2016.
The report on the index also includes a section that calculates the mortgage payment on a median-priced home as a percentage of the median national income. Historically, that percentage is just above 21%. Here are the percentages since June of 2018:Again, we can see that Seaport condo affordability is much better today than the historical average and has been getting better over the last year and a half.
Whether you’re thinking about buying your first Beacon Hill condominium or moving up to the high-rise luxury condo market of your dreams, don’t let the false narrative about affordability prevent you from moving forward. From an affordability standpoint, this is one of the best times to buy a Boston condo in the last 30 years.
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