>think the important numbers here are the salary and housing cost ones. In 1970 the average house could be purchased for less than 2 years of salary. Today it costs 5.8 years of salary.
But no one pays cash for their house. They get a mortgage and so the monthly mortgage payment is (mostly) what matters. Back in the 70s you're paying 10%+ on your mortgage while today it's more like 3.
That is true, but somehow elides the reality that even if interest rates were zero, you would still end up having to "divert" 5.8 years of median salary to own a median house in 2021, which has significant implications for lots of other aspects of life, particularly but not limited to retirement.
But, again, you're using purchase price which is not how people buy homes. For $100,000 borrowed that's $422 a month at 3% and and $1,264 at 15%. Mortgage payments as a % of income are at historic lows:
This is an unusually good time to be a home owner. You can borrow at near 0 or even slightly negative real interest rates and buy an asset that is almost guaranteed to hold/increase in value.
Come on. I just purchased my first home in my late 20s and I am one of the very few in my circle to do it. To suggest anyone has a 400 dollar mortgage payment is just ridiculous and untrue. MY rate is 2.78%. I pay $1000 and thats on the very cheap side for where I live. Average is 1700 and up(I live in an isolated area, but an extremely dense/populated state)
Your comment seems disingenuous. You're also discounting the fact that you need a large downpayment (10,000+) to even get a mortgage in the first place. Do you not live in the USA? Housing prices are a real problem for my generation.
People live in homes for their entire lives. If they decide to be owners rather than renters, over the course of their life (actually, typically somewhat less than their whole lives) they will end up mortgage free. This is an important component of most people's retirement planning, in fact.
What's the cost to get to that point? It used to 2x annual salary, it's now nearly 6x annual salary. That's 4 full years of earnings which vanish into owning a home. If you do not reverse mortgage or sell during retirement, you effectively "lose" this money.
That "best-case" is unrealistically favorable to the 1970s buyer. In 2020, you can almost get that zero interest mortgage. In the 1970s, you are going to be paying at least 10% on top of that.
Sure, but the same inflation that was driving up mortgage rates was also reducing the real value of the balance of the loan. You can't just look at rates here.
We're talking about affordability here. And my point is that to determine if something is affordable you have to look at monthly payment and not the purchase price.
By that measure you also have to take into account that while you are renting to save up for the down payment you are paying a rent much greater in proportioning to your income. You are making a car payment much greater in proportion to your income. You also very likely are paying a student loan payment that did not exist for the 1970 home buyer. It is much more difficult to save up for even the down payment and more difficult to get approved for a home loan because you already have significant debt which the 1970 home buyer did not. In totality the debt driven economy makes homes less affordable…it’s not just about a monthly payment.
OK, sure. But inflation has an effect on the monthly payment as well. Assuming stagnant real wages (pay raises pace inflation exactly) if inflation is at 7% but you're paying 10% interest, by the end of a 30-year loan your fixed payment is effectively 8x smaller in real terms than it was at the start of the loan.
In other words, in that environment it was feasible to stretch to buy a home even at a high interest rate, because you knew that every year your fixed payment would decrease significantly as a share of your income.
Sure, because no one has 5.8 years of cash on hand, its almost an impossible target for most. 2 years of cash is possible though. Even the ability to put down 6 months of cash would have a massive impact on a loan for 2x your salary and not so much on a loan for ~6x salary.
Not paying attention to the total and only focusing on the monthly payment is how most people get into future crushing debt and very much not a good thing.
The reason rates were so high was because of interest. Back then you could expect your income to increase so the interest wasn't as bad as the nominal rate.
But no one pays cash for their house. They get a mortgage and so the monthly mortgage payment is (mostly) what matters. Back in the 70s you're paying 10%+ on your mortgage while today it's more like 3.