With Case Shiller out later today, its as good a time as any to take a look at what the actual cost of home ownership is.

The current Fed policy of ultra low rates, have made ownership costs on a monthly basis appear cheap. However, the most important ratio — median annual Income to Housing costs — shows that prices still remains elevated at at 363% versus the prior decade ratio of 300-325%.


via Visual Economics

Category: Credit, Federal Reserve, Real Estate

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

17 Responses to “Cost of Home Ownership”

  1. phb says:

    How then does the graphic make the statement “Low interest rates combined with a drop in RE values have made owning a home MORE affordable TODAY than it has been in over 30 years”???? Looks to this eye that home values are STILL inflated and has a way to go before the reversion to the 30 year mean is accomplished. What am I overlooking?

  2. gato.chan says:

    Because the monthly payment as a percentage of income is the lowest in 30 years (bottom graph). Look back at the early 80s and you’ll see that the amount of monthly income to service a mortgage was on average over 40% of income.

    I am currently looking to purchase my first home, so as part of my due diligence I ran a similar report based on the Fed’s Z1 and found the same results (although with the Fed data there was one year in the late 70s that was cheaper than ’09). That data was what pushed me from ‘waiting until things get cheaper’ to ‘maybe I should start looking’

    The one part that I still have trouble with is that looking at the numbers this way shows that bubble prices were not that far out of line with the past

  3. schirimiester says:

    The cost of a home must include all the expenses required to MAINTAIN your house, not just purchase it.
    The title is a bit misleading IMO.

    The joy of home ownership is vastly overrated.

  4. nemo says:

    “However, the most important ratio — median annual Income to Housing costs — shows that prices still remains elevated at at 363% versus the prior decade ratio of 300-325%.”

    Grantham recently pointed out the equally obvious — the S&P still remains seriously overpriced at 1100 by historical standards (and given the piss-poor prospects for the economy over the next many years), and that should be at 850. Both the housing and equity markets have continued mean reversion in their futures.

  5. pboiler94 says:

    A different conclusion:
    1. Leverage is being reduced for new purchases (higher down payment, cash buys of repos)
    2. Buyers are purchasing less home and not stretching for McMansions
    3. Government bought MBS keeps interest rates artifically low.

    Homes are still too expensive, so prices will continue to fall.

    If in a poor economy I choose to buy a $150K condo vs. a $450K home, did housing become more affordable in my city? Or did I choose to make it more affordable because of my fear of a continued poor economy?


  6. Thalamus says:

    It would be interesting to compare median house prices/ median earnings each year. My dad purchased an average house in 1972 for $18,000 on an average salary of $18,000. Thats a multiple of 1 to 1, but today it would be 4.0+ to 1, making today much less affordable.

  7. ashpelham2 says:

    Yeah, the third graphic shows things to not be that far out of order, and perhaps, even better.

    Thalamus brings up a good point about the price of home versus annual income. This was negated by creative financing. Now that there is less of that, there is less of a market for high end homes.

    Another point I’d like to bring up is the other household costs. While graph three shows a reasonable amount of increase over time in the HOUSE debt to income, Americans piled on much more debt than just a mortgage. Also, this graph probably doesn’t include second mortgages, or HELOC’s, and most certainly not auto, credit card, higher energy bills, etc. Those are variable numbers, where often, a mortgage payment stays roughly the same for years and years, outside of rate resets or refis.

    It’s not just the big ticket items that add up to kill a budget. I still firmly believe that 4.00 gasoline nationwide sent us over the cliff.

  8. bsneath says:

    While taxes & insurance need to be added and would somewhat mute the lower cost effect of the mortgage interest component, this is never the less significant. Price is less a factor to many homeowners than is monthly payments. They may be looking at their “dream house” as something more than an investment. The fact that homeownership costs have fallen might result in a surprisingly strong Spring home sale season.

  9. DeDude says:

    The folly of averaging on full display. How common is it to have a monthly income of $3900 and a mortgage of $650? In this aging population we have about 50% of homeowners that own their home and the rest having a mortgage. The relevant cost of owning a home is the % of median income going to pay the mortgage on a median cost house at median rates on a plain vanilla 30 year loan.

  10. ashpelham2 says:

    Good point DeDude. I guess I had assumed that this graph excluded people who did not have a mortgage, so as to filter out that noise. I know that I recently read that the average mortgage payment nationwide was actually somewhere around $900.00 monthly, so that $650 is probably already discredited. Obviously, an average mortgage payment calc would not include people with $0.00 mortgage payments.

    Graph 1 is the most compelling of the three, but they all look real purdy.

  11. DC says:

    Owning dramatically reduces mobility. Gone for most are the days of lifetime employment with a single employer. Today’s worker must balance the desire for stability with the reality that jobs disappear with little or no notice. Right now there are jobs unfilled because the qualified workers cannot or will not sell a house in another geographic region.

    And if Congress ever had the balls to kill the mortgage interest deduction (which it won’t) that would knock a few more percentage points off the American Dream. It’s a fat subsidy to a “special interest group” (that includes you, populists and tea partiers) with a powerful cadre of lobbyists representing home builders and real estate agents. It’s always at the top of any tax reform list yet invariably gets immediately shot down.

  12. dwkunkel says:

    The reality of the mortgage interest deduction is that several renters are effectively subsidising someone else’s mortgage. You’d think this would generate some populist outrage.

  13. Dow says:

    I’d love to see an overlay of just how many members of the household’s pay the mortgage.

    In 1975, odds were pretty good that ‘monthly income’ came from just 1 person in a 4-person household (adult couple with 2 kids). Today, it takes two people working to pay the mortgage. I don’t see how “owning a home more affordable today than in the last 30 years.”

    Unless I’m missing something, the basic math says it’s significantly less affordable today.

  14. Thor says:

    Dedude – care to share with us where you got that 50% number? Did you make it up? The Census bureau put the percentage of homes in this country with a mortgage at about 70%

  15. ZackAttack says:

    If banks thought houses, after taxes, insurance and maintenance, were such a great investment, they’d never have messed with any of that nasty mortgage paper and would welcome them on their books as REO.

  16. Mysticdog says:

    Even just looking at homeowners, that third graph is so misleading. It is well known that incomes for the middle class have been mostly stagnant while the wealthiest have seen their incomes rise. So the average doesn’t really reflect what most people experience, but is wildly skewed by the vast transference of wealth to the upper eschalons of society.

    anyone trying to buy a home with a middle class income in the past 6 years knows that what their income will buy has decreased significantly, even with the insane mortgage vehicles the banksters devised to make the system work for them.