A long time ago, a gallon of milk used to be $0.30. Gas was $0:12 a gallon. But not anymore. Houses were also much less expensive than they are now. It was inflation that raised the price of all three of these items, along with the price of almost every other item we purchase.
The reason we can still afford to purchase items that we want or need, is because our wages have also risen over time. The better measure of whether an item is more expensive than it was before is what percentage of our income it takes to purchase that item today compared to an earlier time. Let’s look at buying a home.
The cost of a home is determined by three major components: price, mortgage rate and wages. So the big question is are we paying a greater percentage of our wages toward our monthly mortgage payment today than previous generations? Surprisingly, the answer is no.
Historically, Americans have paid just over 21% of their income toward their monthly mortgage payment. Though home prices are higher than before, wages have risen as well. And, the most important component in the cost equation, the interest rate, is dramatically lower than it was in the 1970’s, 1980’s, 1990’s and 2000’s.
Today, according to the latest Home Affordability Index just released by the National Association of Realtors, Americans are paying 17.4% of their income toward their mortgage payment. This is much lower than the 21% average previous generations have paid.
So the bottom line is that the cost of purchasing a home today is a bargain compared to previous generations when we look at it from a percentage of wages basis. However, with interest rates expected to increase and home prices continuing to appreciate, that will not always be the case.
Whether you are buying your first home or looking to move-up to your dream home, buying a home sooner rather than later probably makes the most sense and could save you a substantial amount of money over the course of the mortgage loan.
If you are thinking about buying a home this year and want to talk more about the benefits of buying a home today instead of later in the year, feel free to reach out to me.