Today, the typical home price is six times the median household income of about $71,000.Ĭredit availability has greatly increased It also created a bubble that led to the 2008 housing crash. “That allowed those shopping to buy more home than their income level would traditionally support,” he said. The sharp rise in 2005 was largely fueled by expanded credit in the mortgage market, said Walden, with mortgages being offered based on a buyer’s unverified income, and through products like interest-only, adjustable-rate and negative amortizing loans. In 2000, as interest rates began to drop below 8%, the ratio began to rise, reaching a point in 2005 where home prices were almost five and a half times the median income. Historically, home prices were between three to four times the median income, a ratio that remained consistent from 1975 until 2000, according to Black Knight. “We have data going back to 1970 and it is the highest we’ve seen by far.” “We now have the highest ratio of home price to income that we’ve seen in the past 50 years plus,” said Walden. Over the past five years, while the average home price has gone up 60%, the average income has risen less than 15%. Making affordability matters worse, home prices are significantly out of whack with income levels. That’s part of the reason why home prices are so high today. Interest rates have been below 5% for the past 11 years, with the weekly average reaching an all-time low of 2.65% in January 2021. So a 1% decline in interest rates allows you to buy 10% to 12% more home, with the exact same amount of money.” “It gives folks the ability to buy more home with the same amount of income. “When we lower interest rates it allows home prices to grow much more quickly than incomes,” said Walden. With the typical home currently costing $434,978, and rates over 6%, the monthly mortgage payment of $2,061 eats up more than 36% of the median monthly income, according to Black Knight. “If you reduce interest rates by 8.5% that doubles your buying power,” said Andy Walden, vice president of enterprise research at Black Knight. That brought the monthly payment down to $640, and took up just 30% of the median income. But with mortgage rates averaging 18.45% that month, the $870 monthly payment took up about 55% of the median income at the time, according to Black Knight, a mortgage data company.īy October 1986, rates had dropped to 9.97% and a typical home was $91,488. In October 1981 a typical home cost $70,398. Mortgage rates were high in the 1980s, but home prices were a lot less expensive, too. Given wage growth, sky-high home prices and rapidly rising interest rates, homes today are the least affordable they have been in 35 years. By the mid-1980s though, mortgage rates had fallen somewhat, making financing more affordable, even with rates near 10%.īut many things have changed since the 1980s. Those ultra-high rates made homeownership less affordable in the early 1980s than it is now. “Unfortunately, now people don’t remember how Baby Boomers were getting rates of 10%, 12% and higher for most of the 1980s,” Strait said. Although it may come as cold comfort to someone who let a 3% rate slip through their fingers just seven months ago, today’s interest rates are, historically speaking, still relatively low. This week, the 30-year fixed-rate mortgage rate hit an average of 6.70%. The average mortgage rate is based on a survey of conventional home purchase loans for borrowers who put 20% down and have excellent credit. The following month, in October 1981, the average weekly interest rate for a 30-year, fixed rate loan hit an all-time high of 18.6%, according to Freddie Mac. “They said, ‘We made it in just under the wire, next week it is going to 20%!’” “They were so delighted to be closing at 19%,” said Strait, who now works at William Raveis Real Estate in Danbury, Connecticut. The couple had told her they were hoping to close on their new home before rates moved any higher. Strait recalled one couple who were actually relieved when they locked in a 30-year fixed-rate mortgage at 19% in September 1981. Think mortgage rates are high now? Connie Strait remembers when she was starting her career in real estate in the early 1980s and buyers were contending with rates three times higher.
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