Buying a home is imbedded in the American Dream.
But with the price increases we’ve all seen over the past 15 years—and no end in sight—buying today seems like a much bigger hill to climb then it was back in the “glory days” of 2000.
Last weekend, my friend Jim pulled out a clipping from the March 6 edition of the Denver Post.
The article highlighted skyrocketing home prices in the little mountain town of Salida, Colorado.
It caught his attention because Salida is the town his daughter, Olivia, has been eyeing for over a year, but she’s been hoping homes would become more affordable.
Married with two little girls, Olivia and her husband are eager to buy in a small community like Salida, but Jim is concerned they’re already priced out. And if I believed everything I read, I would be too.
The article painted the future of home buying as downright hopeless, saying that the average home price more than doubled over the past 15 years—from $124,600 in 2000 to $287,400 in 2015—and, even worse, that average wages didn’t keep up with house prices (not even close!).
In fact, while housing prices more than doubled, wages only increased by 25%. It’s a pretty dismal tale, and Jim clearly wanted some advice. “How will they be able to afford anything decent? Has affording a home really become America’s pipe dream?”
Jim was upset by the article, and I agree that those are some scary statistics. But what bothered me most about the article wasn’t the content, but that it stopped short of telling the whole story. Of course, the headline wouldn’t be as thrilling, but if you look at the details of what’s happening, the real news may be a dream come true for today’s homebuyers.
What the Denver Post article (and many more like it) didn’t take into account is how today’s low interest rates impact affordability.
As I told Jim, all you need to do is compare interest rates then and now, and you suddenly see a completely different picture…one that just may have Olivia sitting pretty in a new home.
Here’s the rest of the story:
- In 2000, the average 30-year fixed rate mortgage was 8%. That means that if Olivia and her husband had put 20% down on a home priced at $99,680, their mortgage including principal and interest payment would have been $727 a month. Not bad, and very reasonable based on their household income at the time of $4,000 a month.
- In 2015, the average 30-year fixed rate mortgage was 3.75%. If Olivia and her husband had bought the same house 15 years later, it would now be priced at about $229,920. If they put down 20%, their monthly payment would have been $1,061, an increase of only $334 a month compared to 15 years earlier.
Olivia and her husband both work in Salida, where wages increased 25% in that 15-year time period. This means their household income was increased by $1,000 a month, more than making up the difference in the mortgage payment. That’s not so bad is it? In fact, when you look at the big picture, that home in Salida may actually be more affordable today.
As I explained to Jim, here’s where we are today: Yes, housing prices are continually moving up, but the combination of wage increases and low interest rates make housing at least as affordable as it was in 2000, if not more so. (Nationally, wages increased by even more than in the tiny town of Salida, though housing prices in many areas increased at a higher rate as well.)
So don’t let the headlines fool you: the dream is not lost. If, like Olivia, you’ve been waiting for an “affordable” time to buy, the time is now. Take advantage of historically low interest rates, be realistic about your budget so you’re not buying more than you can afford, and go make your own dream come true.
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