The American Dream

Everyone knows the cost of homeownership has soared, but the process of putting some numbers on the increase is eye-opening. In January 2010, the median sale price for an existing (not new construction) home was $164,900, according to the National Association of Realtors (NAR). Based on that median price, a prospective home buyer would have been required to make a down payment of around $33,000 (amounting to 20% of purchase price) to qualify for a mortgage that conformed to lending criteria set by Freddie Mac and Fannie Mae. At that same time, the average rate on a 30-year fixed-rate mortgage was around 5.0%. Using that 5.0% mortgage rate, the same prospective buyer would have been required to make monthly payments of $707 (principal and interest only) for the next 30 years to cover the remaining 80% of the purchase price. That doesn’t seem too onerous.

Now, let’s look at where those figures are today. As of July 2023, the median sale price for an existing home had increased to $406,700, and the average rate on a 30-year fixed-rate mortgage has increased to around 7.2%. Based on those figures, a prospective home buyer would be required to make a down payment of $81,340 in addition to making monthly mortgage payments of $2,213 for the next 30 years. You can see in the chart below that the required down payment and monthly mortgage payment grew at annualized rates of 6.9% and 8.8%, respectively, over that time frame. That’s pretty incredible.

But it should be recognized that the value of the dollar has declined over time as a result of inflation. In fact, inflation grew at a 2.6% annualized rate from the beginning of 2010 through July 2023. The chart below shows how the cost of homeownership has grown after adjusting for inflation. You will see that the annualized growth rates in the chart above were each reduced by the 2.6% inflation rate, resulting in inflation-adjusted growth rates of 4.2% for the down payment and 6.1% for the monthly mortgage payment. Those are pretty astounding figures, and they reflect both the dramatic rise in housing prices as well as the recent sharp increase in mortgage rates.

Even with incomes rising at a better clip over the past couple of years, housing has become unaffordable for the large majority of the middle class. As such, the issue of housing affordability is likely to receive increased attention heading into the election next year. Candidates will be eager to use the issue to gain the support of voters, particularly younger ones, who have not participated in the housing gains and are staring at the prospect of being forever priced out of the market. These same voters will have to contend with a softer labor market, slower income growth, higher prices for non-discretionary goods and services, and the resumption of student loan payments following a 3+ year hiatus. Suffice it to say that the current trajectory for the housing market is unsustainable, and something will have to break. Those assuming that an ultra-tight supply of housing (due largely to the rapid increase in mortgage rates) will continue to exert upward pressure on housing prices may be in for a rude awakening at some point in the not-too-distant future.