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There appears to be a rise in the number of headlines touting the unaffordability of housing in America. Is it actually true? In this article, real estate investor Andrew Shader discusses what affordability means and uncovers the truth behind housing affordability.
The price of a home is important, for sure, but it's not the only factor that needs to be considered. For some things -- bicycles or bananas, for example -- it's easy to say how affordable they are simply based on the price. If you have the money, you can afford it, if that's how you choose to spend your money. For most of us, homes don't work like that.
To understand the affordability of a home, you must first consider your income — do you make enough money to make the monthly payments? You also need to consider the cost of the money you need to borrow — primarily measured as the interest rate you will pay for a mortgage loan. What the money to buy your home will cost is nearly as important as the home's asking price. Interest is a big part of your monthly payment.
At its most basic level, affordability is the ratio between your income and your house payment. That's what banks look at when determining how much money you can borrow for a home loan.
Do homes cost more than ever before? Indeed, they do, and that's why so many people rush to claim that they are less affordable than in years past. But to answer the question, "are homes more or less affordable than in the past," we should take a look at the historical data.
To compare today's home affordability to a previous year's, we need to consider income levels and interest rates for the year we want to compare. You also need to adjust for inflation. Inflation causes the price of everything to rise, but rising income normally offsets the buying power of at least a portion of inflation.
If we look at the last 40 years and use inflation-adjusted dollars to considering the ratio between median income and a median house payment, there have been only two years that purchasing a home was less expensive than today. Only in 2020 and 2010 was it more affordable to buy a home than it is now.
That's good news, right? It is, but there is one more thing to consider, and that's where you live — or, more precisely, where you want to buy a home. The ratio between median income and median home price varies region by region. In 2019, for example, the price-to-income ratio for Toledo, OH was 2.14, but that same year it was 9.69 in San Jose, CA.
Next time someone says that homes are less affordable today than in the past, ask them if they mean homes are more expensive than in the past — because that statement is true. If they mean homes are less affordable, then ask them where they are talking about — because, in many places, houses are generally more affordable than they have been in the past.
About Andrew Shader
Andrew Shader is an entrepreneur and a successful real estate developer and investor in Fort Lauderdale, Florida. He got his Business Management and Marketing degree from Florida State University. After spending years in the insurance industry, Mr. Shader decided to shift his focus to real estate. Andrew specializes in value-added properties and boosting property value through investment.