Written by: Mike Cooke CHR
Imagine it’s 1979. The average single-family home in metro Denver carries a price tag of $66,051. Don’t you wish we could go back to those days when housing was so affordable?
A recent affordability study by Colorado Home Realty (CHR) came to a shocking conclusion: The average single-family home in 2016, selling at $441,172, is significantly more affordable than its 1979 counterpart!
That counterintuitive conclusion will only make sense if we step back for a moment and understand what makes something affordable. Price alone is not the determining factor. Affordability is a function of payment required versus income available. For a piece of real estate, payments are a function of both the amount of the mortgage and the interest rate paid.
Let’s look at house payments versus income and we’ll see why the 1979 house, with its seemingly minuscule cost, was less affordable than today’s home costing almost seven times as much.
In 1979, mortgage interest rates were 11.2%. The payment on a 30-year mortgage after making a 10% down payment was $575 per month. The average per person income in metro Denver in 1979 was $10,747 per year or $896 monthly. The ratio of payment to income was 64%. It took 64% of an individual’s income just to cover the house payment. That’s not very affordable.
With a 10% down payment on a 30-year loan at 3.65% in 2016, the payment on the $441k home is $1,816. Average per person income in 2016 in the seven-county metro Denver area was $4,759 per month ($57,102 annually). The monthly house payment only took 38% of monthly income.
Bottom line: The 2016 house requires a smaller percentage of monthly income than the 1979 house and is, therefore, more affordable.
The CHR study looked at the ratio of house payment to income for every year since 1974 in metro Denver based on the prevailing interest rate and average home price in any given year compared to average per capita income at that time. The results are summarized on the accompanying chart.
Affordability was at its best in 2012, when only 30% of per capita income was required to buy a house. At 38%, affordability is better today than it was at any time from 1974 through 2007!
Homes are more affordable today than they’ve been for 34 out of the last 43 years. People have been willing to pay a much higher percentage of income over the last four decades to enjoy the advantages of home ownership. It’s one more indication that we are probably not facing a new housing bubble.
Footnote: Those ratios of payment to income may look high to you. Would most people want to spend 38% of monthly income on a home loan? Isn’t that still pretty unaffordable? Our study used “per capita income”, which is the average income of a single individual. While individuals buy homes, most properties are purchased by a family or household that consists of more than one wage earner. Using family or household income would give a better picture of the true situation. After quite a search, we could not find reliable household or family income for the whole 43-year period. As a result, we used per capita income. We’ll continue to search for family or household income. As just one example, 2016 average family income in metro Denver was $89,473 or $7,456 per month. The average P&I payment of $1,816 represents just 24% of monthly income, an amount that is easily with the most stringent loan underwriting guidelines.