You can’t help but see the headlines that report that buying a home today is less affordable than it was at any other time in the last ten years. Now these headlines are definitely accurate for today’s market. But, have you ever wondered why the headlines don’t say the last 25 years, the last 20 years, or even the last 11 years?
So obviously, buying a home is more expensive now than during the ten years immediately following one of the worst housing crashes in American history. As you know, over the past decade, the market was flooded with distressed properties (foreclosures and short sales) that were selling at 10-50% discounts. There were so many distressed properties that the prices of non-distressed properties in the same neighborhoods were lowered and mortgage rates were kept low to help the economy.
This is what happened in my development which saw a lot of short sales. These short sales brought down the market value of my home and my neighbors homes in our development and impacted our ability to refinance or sell our homes for a good price.
Now fortunately, prices have since recovered and mortgage rates have increased as the economy has gained strength. This has and will continue to impact housing affordability moving forward.
However, let’s put today’s housing affordability into some historical context. What was housing affordability like prior to the housing crash? Well for that, we turn to the National Association of Realtors (NAR) which issues their Affordability Index each month.
In July 2018, the Affordability Index stood at 138.8. The index had been higher each of the last ten years, peaking at 197 in 2012. (The higher the index, the more affordable houses are).
But the average Affordability Index between 1990 and 2007, prior to the housing crash, was just 123 and there were no years with an index above 133. So, as you can see, homes are more affordable today than at any time during the eighteen years prior to the housing crash.
Now, with home prices continuing to appreciate and mortgage rates increasing, home affordability will likely continue to slide. However, this does not mean that buying a house today in not an attainable goal in most or our local markets as it is less expensive today to buy a home than during the eighteen-year stretch immediately preceding the housing bubble and crash.