Is Housing Unaffordable? Is a crash coming?

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Is housing still affordable?

In the recent weeks, we have been talking about affordability dropping compare to 12 month ago due to price increase. I want to look at this affordability issue in a bigger picture.

Back in 1980, a new car costs about $7,200, and a gallon of gas was $1.20. Movie ticket was $2.25 and a gallon milk was 2.16. Relatively, everything is expensive today! People tend to forget or overlook one big factor – Income. Median Household income in 1980 was 18,000 compare to $76,000 today.

In my blog last week we looked at the relationship between home price and interest rate today and and the effect on monthly payments. if you want to read it, i will have the link posted below or in the comment box.

I want to look at it at a different angle. Yes, affordability definitely had dropped compare to 12-15 month ago. Is housing not affordable or just less affordable?

In 1980, the average mortgage interest rate was 13.75%, the median income was $18,000, and a median detached home was $108,000. So the monthly mortgage is 69% of a home owner’s income.

If you plug the same sets of number for 2007 right before the crash, it was 66% of the household income.

What is that number today? It’s 40%. Yes …It did increase from 38% in 2020 but its is still a long way from 2007 when people use 2/3 of their income on house payments.

This is another reason that I believe that with the current environment, housing market is not crashing. However, as the rate rises in the future, the housing market will most certainly downshift. The good news is…we are seeing signs of slowing down but we are not quite there yet.

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