Dirty Deep Dive: Real Estate Affordability

Giving perspective to the current affordability squeeze

For We, Human(s), all things are relative. If prices paid today are higher than they were this time last year then that is inflation and it is bad. If income received this year is higher than last year than those are increased profits and that is good. A thing in and of itself lacks meaning without comparing it to something else. It is the contrast of relationships that define. Good versus bad. Increasing versus decreasing.

That said, one’s perspective, especially as it pertains to data and numbers, can be skewed by comparing seemingly related figures which, taken out of context, don’t really tell you much at all. The price of a truck twenty years ago was much less compared to today. But incomes have also increased. Interest rates are different. Technology and features are different. It is a different world today than it was yesterday.

I spend a good deal of time (probably more than I should) in the Twitter-verse. That is my social addiction of choice. I spend time there and read the distilled thoughts of people who agree and disagree with me. The reason I do this is because I think that my perspective is only an approximation of reality (influenced by knowledge, experience, belief, etc). And I want to make it the most accurate approximation that I can. So my sample size must be broad. I want to see reality from other’s perspectives. Because they might know things that I do not. They may have heard news that I’ve missed. They may understand that which I misunderstand.

Of course some (a lot?) of the takes on Twitter (and the other socials) are complete trash. One must be wary. And so when I come across a take, even one that I fundamentally agree with, sometimes I spend time to test that take. Doing that makes me more knowledgeable. It clarifies my understanding and confirms or disproves my assumptions. Hence the catalyst for this post.

Consider the following tweet:

Lance Lambert @NewsLambert

6% mortgage rates/2022 home prices are like 15% mortgage rates/1980 home prices.

I like Lance Lambert very much. I appreciate his takes and believe they are pretty accurate. His worldview comports with mine (mostly). So I read his thread and immediately nodded along and agreed. Then I wondered how true Lance and my beliefs and understandings are (truth defined as the closeness of one’s approximation to actual reality).

The theme of his tweet thread is that mortgage rates cannot be compared to prior year’s rates without context. In other words one can’t look at the current 6.30% rate on a 30-year fixed mortgage and say, ‘ya know, compared to 1995 or 2005 this isn’t that bad.’ As an absolute this is true. But it is not an apples-to-apples comparison. Lance notes that it is the consumer’s payments compared to income that matter most. I completely agree. And Payment is a function of Price and Rate.

So I decided to look at nominal house prices and interest rates for the years 1980, 1981, 1995, 2005, 2018, 2021, and 2022 to create an annual payment for each of those years. I calculated payment assuming 20% down and did not figure for insurance nor taxes. I then compared that to the nominal median income for those same years. Where I had a variety of numbers to choose from (e.g. quarterly interest rates), I tried to get as close to today’s date as possible within those past years. Now is the part where I tell you that this is very generalized information. It is national. It is non-specific. Dear reader, it is Down and Dirty. The following information is only a comparative assessment tool that I use to see where Average Joe¹ is today as compared to yesterday.

This is what I found: