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Home affordability has been the talk of the town for a while and it inspired me to get a feel for the forest in a domain largely cluttered with political opinion instead of scientific method. My objective was to distill the relevant data as much as possible, but no more than that.
The first thing that came to mind was inflation-adjusted home prices. Robert Shiller’s CPI adjusted methods are my favorite and offer the largest view of the forest. The data I downloaded from multpl.com is monthly back to 1987, then quarterly to 1952, then annually to 1890. I did the math to extend it to Sept 2025. I added dates where significant changes in the trace occurred. There are no economic events implied by these date selections.
Shiller CPI Adjusted Home Price Index
The values on the vertical axis are only the output of the calculation and change depending on the reference CPI date chosen. The utility of this plot lies in visually selecting a date and referencing the inflation adjusted median US home prices relative to that date. Shiller’s plot adds building costs, population growth and 10-year interest rates in an attempt to provide context to home price movement. Interestingly, the low correlation proves there’s much more to the pricing picture.
Shiller Home Price Index with Contributors
It’s beyond my ability and interest to explain housing prices—my interest is housing affordability. What stands out to me is the consistency in home pricing vs. purchasing power from WWII until 1997. The periods before and after have been Mr. Toad’s wild ride. We need more information to form a reasoned opinion of the goal—to see what has happened to home affordability.
The actual ability to buy a home not only depends on pricing—but income, mortgage interest rates, the percentage of that income available to service mortgage payments, and non-mortgage home ownership expenses.
That’s for Part II of this post.
(Graph is high-resolution and should be viewed full screen. You can download it.)
A perspective from outside the US.
A lot of news from the US that I get talks about a housing affordability crisis. Yes, recent trends in the US have seen houses become less affordable. And I appreciate that shift in the market hurts.
But housing in the US remains much affordable than in other developed nations.
From https://worldpopulationreview.com/country-rankings/affordable-housing-by-country, some affordability index numbers for various countries:
USA 3.3
Australia 8.1
New Zealand 7.3
United Kingdom 8.8
Japan 12.2
Canada 10.2
So in many other countries, homes are 2-3 times more expensive (relative to median income).
To make sense of this might require the indebtedness numbers for each country. The U.S. “Mortgage as a Percent of Income” is stated to be 30.1%, which is low on the table. Yet, it is also stated that “Countries where housing is the hardest to afford include …..the United States”. Empasis is mine.
Young U. S. buyers are supposedly strapped with other debt. If I spend 75% of my income on expenses including food, utilities, rent, loans and credit cards, that might make a home purchase impossible. Also, real estate taxes are a factor.
I’ve decided that what this is, is a lifestyle decision and a home may not be a necessity. For example, air travel in the U.S. set a record in 2025, although there are indicators that business travel reduced. We all enjoy experiences, but I’ve read repeatedly that younger people value experiences very highly. That includes entertainment, dining and travel. These are things that those seeking to buy a home may forgo or reduce in order to achieve that goal.
Interesting. I wonder about the methodology. And about why it’s really telling us, assuming I’m reading it correctly. The summary says, “Countries where housing is the hardest to afford include Australia, Canada, the United States, China, New Zealand, and the United Kingdom.” Yet, depending on the measure used, the U.S. is the third or fourth most affordable country in the study, so it’s hard to see why they’d call out the U.S. as hard to afford. Also the mortgage as a % of income is shown as above 100% for many countries. I suppose I’m not reading it correctly because that makes no sense to me.
I think this is very interesting. I do agree that perhaps a few metro areas should be picked, otherwise it isn’t that meaningful. Prices for someone even in a town like Bremerton, WA, are high, then try Portland or Seattle and it is far more. You need two decent salaries to even be in the game of looking for a house. What about an engineer who is living by himself, who would love to be able to fix it up themselves, he can’t afford any stick built house that isn’t in a crime ridden neighborhood.
I’m interested in the rise since 1950. Women slowly entered the workforce and they have also slowly made gains. So I don’t think it is accurate to use household income to look at affordability. I think it would be more accurate to look at personal income. Graph how much the average income could afford vs the cost of a home at a few different locations, that would paint an interesting picture. It would show that it isn’t a matter of being clever or saving money, it would show how times have changed and why so many young people feel that home ownership is beyond their means.
Looking forward to part II
I won’t argue that housing is expensive, because it is. However, this is not news to me and bargain hunters can find exceptions.
My first home was purchased in 1978. It was during one of those real estate booms that occur from time to time. Three years later there was a bust and prices settled, but a loan I took out for improvements hit 21% interest. Yow!
One thing about real estate it is said that “all real estate is local”. Average pricing can be deceptive. For my first house, I capitulated and purchased a smaller house on a larger lot. It was all I could afford with a 20% down payment. It was significantly less than the average and median prices in that small city. I later purchased a 3BR condo when I downsized for much less than the average prices at the time. Some compromise and hunting will yield desireable bargains.
I sold both at a good price and both were in better condition when I sold than when I purchased. Many apparently think decorating is maintenance. I currently live in a 2,000 sq. ft. manufactured home which I purchased for 55% of the average price in this community. I invested an additional $15,000 to take care of maintenance issues. Because it is a manufactured home on land I don’t own, I pay $350 annual property tax, but no real estate tax. I also pay an annual resort fee.
Today, the city for my first home has a population of about 53,000, median age is 38. Prices vary significantly. Average home prices are $481,000, the mean is $510,000 and the highest are $700,000-$1 million+. Clearly, the low end is substantially less than the median, and really nice 3-BR condos are available for $250,000. Median property tax is $4,306. Average rent is $2,500 (median $1,437) and household income is about $120,000. In other words, there is reasonable property available and with very good public schools.
Certainly, some neighborhoods are unaffordable. NYC and many CA cities come to mind. If the real estate price isn’t prohibitive, then the taxes may be, but I think bargain hunters can do well in many locales.
Bill Bernstein wrote about this topic in “The Investor’s Manifesto”. His discussion of the cost to rent versus the cost of monthly mortgage payments for the same house was interesting. Also in another article of his which I can’t locate, he produced a graph which showed the varying gap between the two for a median priced home over decades. And how the gap would become very wide just before a bubble would pop.
I have suggested to my adult children that when deciding how much they can afford to pay for a house, they include the cost of escrowing money each month into a bank account dedicated for future unpredictable but inevitable maintenance and repair expenses which they will surely encounter.
Interesting article. I look forward to part II.
I have told my children in the past to never spend more than 75-80% of what they are qualified for. Whomever qualifies you is determining what is the MAXIMUM they are willing to risk loaning you. They have their, not your best interests in mind when producing your limit.
My advice to my kids was pretty basic stuff for most of us older HD readers, but I think they found it useful.
Their monthly income, after taxes and retirement contributions funds their lifestyle which can be divided into two categories:
To answer the question of how much can they afford to spend on a house, its determined by the costs of the two areas above. They can choose how much to allocate to each, or they can let the lender decide for them. I suspect if they choose the latter path, they would likely end up in a more expensive home but find themselves strapped for cash.
You gave your kids wise advice David.
It would be interesting to see if there’s any correlation between the rise in mortgage-backed securities (MBS) and declining housing affordability in one of your lovely graphs. I think there’s a connection. When banks started securitizing mortgages and selling them off to Wall Street instead of holding the risk themselves, it changed the lending landscape. Banks became more willing to approve larger individual loans since they weren’t stuck with the risk anymore. That shift likely pushed up property prices by increasing what buyers could borrow, without any corresponding increase in housing supply.
The rise of MBS is entirely the fault of the FASB which establishes GAAP rules for reporting by businesses. Prior to the Savings and Loan crisis of the early 1980’s S&Ls could originate and retain on their books loans for personal home mortgages. They were allowed to retain these assets and value them at their amortized value. Then, the FASB decided that they must value them at market value reflecting changes in value due to changes in interest rates. Instantly one third of S&Ls were insolvent. And, they could no longer hold these long term loans on their books. The FNMA was then created to buy these loans from the originators allowing them to be re-marketed as MBS. England, Canada and other countries avoid this problem by not financing 30 year home loans.
When we bought our first house in 1970 we needed 20% down and mortgage interest rates were 9-1/2% That meant we could buy very little which meant only what used to be called a very basic starter home.
I wonder if the demand for more, bigger and better and the ability to put little even nothing down is a driver of higher prices.
If prices keep going up it means somebody is paying those higher prices.
Yesterday I helped one of the girls whose wedding dress I’m buying move into her first home. The mortgage term is 35 years!
I am not sure that a national view of this topic will be that helpful. Regional differences are so huge that trying to think about affordability in San Francisco and Omaha at the same time is impossible.
Regional differences are likely to show a bigger problem of affordability in some locations, but affordability is a problem everywhere.
If you don’t like the term wage stagnation, then instead plot inflation and wages on the same graph and look at the differences in the slopes.
What else is a problem? Look at the distribution of wealth. Even the 95th percentile has lost compared to the top 1%.
The next post adds the affordability component to the inflation adjusted prices above. It includes 25th percentile (lower income), 50th percentile (median) and 75th percentile income groups. Still nationwide, but interesting.
This is the National Assoc. of Realtors latest metro area home affordability data. I don’t know the math behind it, but I’m sure it’s reasonably accurate.
Definitely correct from a personal perspective, but my little quest here is big-picture and drilling down to the regional would require additional variables. I’m over my head as it is, but I still think the overall real data is interesting. Especially so when income and interest rates come into the picture—which is coming up next. Reverse engineering the math to generate my own plots also provides insight into the data (Shiller’s thoughts) that I wouldn’t have had otherwise.
I don’t think that there are many people who think that there is not an affordability problem.
Warren Buffett on a contributor to the 2008 housing bubble:
“With housing it’s something even more dramatic than that, because most people aspire to own their own home. If you really think that house prices are going to go up next year and the year after, you feel if I don’t buy it this year, I’m going to have to buy it next year. That’s not true of an Internet stock. But it’s true of a home.”
Having bought his home in 1958 Mr. Buffett appears to believe the holding period for a home and investments are the same length – forever.
Same with his partner in crime, Charlie Munger. He was the real estate guy and they both hated it from an investment perspective. Charlie, a real estate attorney, rented for about 30-years and then owned a modest home in Los Angeles for about 70-years. Interestingly, Munger was all-in for family home ownership but thought single folks should be indifferent about it.
In December 2023 I bought and read Poor Charlie’s Almanac which I enjoyed, learned from and recommend.