Monthly Payment vs. Monthly Income
Although past price activity is now referred to as a “bubble,” one reason prices rose as they did is because the cost of financing a progressively more expensive home was staying relatively flat.
The graph shows the change in per capita income and the monthly payment for financing a median priced home at the prevailing 30-year fixed interest rate with a 20% down payment over the last 50 years or so. Notice that incomes doubled several times over, while monthly home payments did not. Homes became progressively more affordable despite rising home prices.
Interest rates allowed this relationship to play out. Rates spiked around 1980. As they fell over the next few decades, payments barely increased. As a percentage of individual income, we’ve recently reached a 50-year low in the cost of financing a home.
In many areas, prices have begun to rise again, but uncertainty over the economy is preventing the rapidly rising prices more characteristic of a recovery. Once greater confidence returns, typical supply and demand forces coupled with rising rates will turn the tables. Acting before the inevitable process occurs is where the “smart money” and smart buyers will be found.
Give me a call today to talk about the options available to you.