A Housing Market “Recovery” Is Further Away Than We Thought

First up, just want to address what affordability actually means, because some people hear affordability, they think price, they think mortgage rates.

It's not.

It's actually three different things.

It's a combination of home prices, so how much you're paying; two, mortgage rates, what it costs to borrow, and I guess if you're buying cash, that part is not in there, but most people are using leverage and are using a loan, so we're gonna talk about mortgage rates; and the third is real wages, how much people are actually earning.

So those are the three elements of affordability, and there are different ways to measure this.

People do it differently.

You know, NAR has their own version, new home builders have their own version, Wells Fargo has their own version.

They're all fine.

I like NAR's because it basically uses something called the payment to income ratio.

This is basically comparing your monthly mortgage payment to your income.

Makes sense, right? Super easy, right? Like, what percentage of your take-home pay is going to your mortgage payment? That, to me, is a very good way to measure affordability, so that's what we're gonna use for our analysis today.

So knowing that, let's talk about the benchmarks and what, quote-unquote, "normal affordability" is in the housing market.

And I told you before, I'm gonna do two different benchmarks.

The first one is the long-term average.

And so basically what we're looking at for a long-term average payment to income ratio is 18.5%.

In other words, on average, going back to 1989, right, so almost 40 years, you could say that the average gross income, before taxes, gross income, about 18 and a half percent of it goes towards your mortgage.

And that average includes great times in the economy.

It also includes terrible times in the economy, right? And it averaged out at 18 and a half percent.

Now, I do think it's important to mention that this only goes back to 1989, and so it does omit one of the worst periods.

Actually, outside of right now, the worst period of housing affordability that we've had in this country, in the nearly 1980s.

Prices weren't high, but mortgage rates were in the double digits.

Some people were paying 15%, even up to 18% mortgage rates.

And at that time, you know, we don't have a data series for that, but you can actually calculate points in time.

I'm getting nerdy about this, sorry.

But 36% of your income back in the early 1980s.