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Affordability Gaps Widen For U.S. Homes
April 15, 2021

Affordability Gaps Widen For U.S. Homes

If saving money were a sport, thirty-four year old Alex Smith might qualify for the national team. He lives with his wife and their 18-month old son in Everett, Washington where they bought a home three years ago. After income taxes, their household income is about $65,000 a year. But Alex is frugal…really frugal. “Before we bought our current home, we lived in the cheapest apartment in the city,” he says. They paid $800 a month in rent, and the couple’s total living costs were a paltry $27,000 a year. That helped them stockpile enough money for a 10 percent down payment on their $450,000 home.

Now, just three years after moving in, their home’s value has soared to $615,000. “First-time homebuyers with normal salaries won’t be able to afford homes in this neighborhood today unless they’re financially and fiscally responsible. And these days, most people aren’t.” Alex adds, “Too many young people, for example, make payments on new cars [instead of buying used]. They buy stuff they don’t need, mostly because there is no financial education system in the United States.”

U.S. home prices aren’t sky-high everywhere. But the affordability gap between different cities keeps growing.

The Case-Shiller Home Price Index might be the most respected source of home price data in the United States because it measures the price changes of specific homes over time. From December 31, 1950 to December 31, 2020, median household income increased faster than median home prices. But that’s a 70-year assessment.

Home Price vs. Median Household Income (US)

Case-Shiller Home Price Index vs. US Median Annual Income

Over the past ten years we’ve seen a different story. Nationally, house prices have risen far faster than household incomes.

Alex Smith’s mortgage charges 3.6 percent interest per year. His mortgage payments are $2,440 per month. “If I bought the same home now, despite being able to get a 30-year mortgage at 3.0 percent interest per year, my mortgage payments would be $3000 a month. That would represent 55 percent of my household income after taxes,” he says. Alex added that he could afford such mortgage payments, if he had to. But he says, based on behavioral spending habits, most people in his income bracket wouldn’t be able to do it. “They simply spend too much on other things.”

Ironically, when combining an assessment of lower mortgage interest rates, inflation and current home prices, American homes were 3 percent more affordable on December 31, 2021 compared to relative affordability 30 years ago. This assumes a 5 percent down payment and the relative annual mortgage interest rate, which has dropped dramatically over the past 30 years. As shown below, homes in Chicago (the lightest shade of blue) are about 30 percent more affordable than they were in 1990. Home prices in New York City (dark red) are roughly 13 percent more affordable compared to January 1990.

Real Monthly Mortgage Payment Price Index
Case-Shiller Home Price Index Adjusted for Inflation and Mortgage Rates * 1990 Baseline

Real Monthly Mortgage Payment Price Index

But price levels in several other cities are stark-raving mad. Homeowners in Denver (light blue) pay roughly 61 percent more to own a home today, compared to 30 years ago. That discounts inflation and the fact that mortgage interest rates plummeted from about 9 percent per year in 1990 to about 3 percent today.

Here’s a broader view of Denver in the image below. Home prices increased 413 percent since 1990 (see the blue line). After inflation, that’s an increase of 169 percent (see grey line). The red line shows homes in Denver were 61 percent less affordable at the beginning of 2021, compared to 30 years ago.

Denver Home Prices and Affordability
January 1990 – December 31, 2021

Denver Home Prices and Affordability - January 1990 - December 31, 2021

Cities like Seattle and San Francisco are also much more expensive; whereas, cities like Tampa and Las Vegas are more affordable today than they were 30 years ago. But relative income levels tear that argument to bits. Median household pre-tax income in Tampa, Florida is about $54,599. In Las Vegas, it’s less than $54,000 a year.

Meanwhile, the median household in Seattle earns almost twice as much. In San Francisco, people earn even more. The median household income is about $112,000 a year. So, while home prices are lower in several cities, relative income levels are lower too.

Young people hoping to buy a home can’t control home prices. They can’t entirely control how much they get paid, either. But they can control one thing: how much they spend on discretionary items. While I chatted with Alex, he told me he used to ride his bicycle, take the bus and walk everywhere because he wanted to save money. He paid $5,500 for his current car, a 2013 Nissan Leaf. And he believes he could get more than that if he sold his car today. As Alex talked excitedly about paying for low-priced cars, I reflected on how few “junkers” I see on the road now compared to when I was young.

Alex is right. Home prices have risen to silly levels. But so, too, has our discretionary spending. That makes buying a home today, for most young people, an uphill battle on two flat tires.

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