How "Affordable" are Homes?

According to this analysis, homes are more affordable than they have been in 20 years.

How’s that for a cheap trick to get you to read more?

There was quite a bit of response to my previous post, Location, location, location…and a reversion to the mean?, which compared the home price histories of two Oakland neighborhoods at opposite ends (but certainly not the extremes) of the economic spectrum. One purpose of that post was to provide a basis to anticipate how these markets might behave in the future, if not in an absolute sense at least relative to one another.

I’d like to expand that post to consider one important concern for someone who is thinking of buying a home: affordability.

There are certainly many factors that go into such a decision, starting with whether this is going to be a place to live or an investment property. Some other factors include:

  • Reliability of income (Is my job secure?)
  • Rent vs Own Consideration (Do I really want to tie myself down?)
  • First-time or move-up buyer (Will I be selling my current home?)

Some of these are subjective and others are difficult to measure, but one factor that is both measurable and meaningful for someone buying a home as a residence is the portion of household income that will go toward monthly payments. This is what I refer to as affordability.

Let’s start by looking at a chart from the previous post.

94621 v 94611new1 How "Affordable" are Homes?

At first glance it looks like the 94621 neighborhood home prices are back at a late 1990’s level and those in 94611 are at 2002 prices. But these are in nominal (current) dollars and we all know that inflation exists, eating into our purchasing power but simultaneously raising our incomes (at least on average). If we modify this chart to include inflation (real dollars), we get:

94621 v 94611real How "Affordable" are Homes?

Now we see that using 1990 as the starting point, home prices haven’t fared too well. Strikingly, the real 94621 neighborhood prices are 26% below those in 1990, and well below that of any year since then. Those in 94611 are still 40% above 1990 prices (an annualized real return on investment of only 1.6%), and currently at 2001 prices.

Now we add another factor. For many home buyers there is one key number: the monthly payment. Overall monthly cost of home ownership can be complicated as it includes taxes, insurance, maintenance, utilities, etc. But for many potential buyers these fade into the background and the loan payment due every month as shown on the HUD-1 document overshadows all.

While during the early-to-mid 2000’s mortgage loan products went off the deep end (and became a major contributor to the bubble), the anchor point of mortgage loans has been the 30-year fixed-rate fully amortized loan. During the early part of this century the loan market was severely distorted by interest-only and negative amortization loans. But interest rates and the resultant monthly payments for 30-year loans are still a useful measure of affordability. In the next chart I factor in the monthly payment on a median home in these neighborhoods at the prevailing 30-year fixed loan interest rate.

94621 v 94611 loan payment How "Affordable" are Homes?

Here we see the normalized monthly payment in real dollars required to purchase a median home in these neighborhoods. The lower the index, the more affordable the home purchase will seem.

Now we have an entirely different perspective on the affordability of a home purchase, at least as measured by the fraction of a paycheck going toward loan payments. By this measure, the cost of a home in 94621 is only half what it was in 1990, and is by far the lowest since then. In 94611, loan costs are about the same as they were at the low in the mid 1990’s, and only about 60% of what they were at the 2006 peak.


While there is still a substantial shadow inventory of underwater properties, at today’s prices and mortgage interest rates, overall there is a large financial capacity to buy. There remain questions such as:

  • When will the economic recovery translate into the necessary buyer confidence?
  • Are there ongoing structural changes that will impact the distribution of income, creating more wealth but in fewer (homebuying) hands?
  • How will demographic changes affect national and local markets?
  • When interest rates do rise (as they will), how will higher payments change demand?

I’m sure there are many other factors and questions. But from a pure affordability standpoint, the cost of buying a home is at or near a 20-year low.


1. ZIP codes are used here for identification purposes only; the neighborhoods are defined in Location, location, location…and a reversion to the mean?. In an attempt to isolate a group of similar homes the properties are in fairly small neighborhoods of 600-800 homes.

2. I have compared my data with those of Zillow (going back only 10 years) and they are very similar, although Zillow’s data shows the pricing peaks occurring a year later. Zillow’s data is less noisy as they look at more properties, but it appears that they exclude the impact of distressed sales. I understand the reasoning, but since in some areas distressed sales are the market it makes sense to me to include them.

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About Jay Wiedwald

I’m a long-time Oakland resident and homeowner who has no ties to the real estate business, but find the residential housing market a fascinating field of study. It is rich with data and impacts everyone, personally and financially. National and regional statistics have their place, but I’m primarily concerned with the micro aspects of the housing market; particularly as they affect individuals and families. My studies have been focused on Alameda County, with an emphasis on the Bay side of the East Bay Hills. Retirement has its benefits.

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14 thoughts on “How "Affordable" are Homes?

  1. Tom Stone

    Jay, I agree that including distressed sales is appropriate in any market where they make up 20% or more of the sales. My particular part of Sonoma County has behaved more like 94611 than 94621 with prices in nominal dollars at late 1990′s levels. I do not expect a more equitable distribution of wealth to take place in the next decade and thus think that we will see a further bifurcation between “Good” and “Bad” neighborhoods. I would recommend staying away from marginal areas unless there are long term trends indicating improvement ( There will be in some). It is my “Feel” that prices in the “Best” neighborhoods of Sonoma County will start to stabilize toward the end of this year or the beginning of 2013. I do expect some further declines after that but think that those declines will be localized and expect appreciation in real terms for some properties within 5 years or so. It’s a good time to buy, for some people.

  2. Bill

    Good analysis on two divided markets. No surprise that there are limited forclosures in the area that has performed better. The other piece of the puzzle that needs to be mentioned is income to the weathly has grown while the middle to lower classes have good backwards in real dollars just like the values in 94621.

    Additionally, beware of affordability when using payment comparisons to justify buying a home. Though it is true that actual cost of owning a home has gone down in your analysis, there is one very important fact to remember. From 2000- 2012, mortgage rates for a $600,000 mortgage went from 8% to 4.25%. Prior to 2002, normal rates ranged for a low of 6.75% to 9.0%. When rates do start to normalize, they will create a major drag on price increases.

  3. Jay Wiedwald Post author

    Bill, I’m of the same opinion as you regarding the likely impact of rising interest rates on home prices. But we have a worthy opposing opinion, another Bill (McNulty) aka Calculated Risk. A while back he wrote this:

    “…there is little relationship between house prices and mortgage rates.”

    CR claims future interest rate changes are discounted by buyers.

    More here:

    To some extent, the evidence is on his side, but with interest rates so low right now we might be in uncharted territory.

    BTW – I did condition my analysis extremely narrowly. There certainly are factors that buyers consider other than loan payment amount.

    Regarding interest rates during 2000-2007, exotic loan products gave the illusion of low cost of ownership for many buyers, especially at the lower end. Sort of, “Nobody paid retail.”

  4. Greg FieldingGreg Fielding

    Excellent analysis Jay.

    There’s another level that I wish we could see added to the mix, but I think it would be too complicated to do it right. I don’t really believe CPI data. And certainly costs of energy and healthy care have gone up far faster than incomes. And obviously student loan debt has exploded in the last 20 years.

    I would love to see a chart of housing costs vs. some measure of disposable income. I get the feeling on the ground that while mortgage payments may be roughly flat, the rest of life’s costs have gone up much faster than our paychecks.

    Given that, I don’t think there is much wiggle room for when interest rates do rise – there’s nowhere else to cut except housing costs.

  5. A. Lewis

    Great post, again, Jay! I have been doing something very similar using Case Schiller and BLS data. The data that’s hard to come by is tiered income localized to the SF MSA, and over time (and especially up to date), so you can do price to income ratios properly. There is some census data, but I’ve had to make a lot of extrapolations and interpolations from it.

    My takeaway, in the end, is that the bifurcation is very real among ‘good’ and ‘weak’ areas, and while the monthly payment is below long term averages for both, the down payment is still 20-30% higher than average for the high and very high end. (the down payment is much more normal or even sub-normal at the low end).

    This is because interest rates are so very historically low, but prices at the high end have only come partway down from bubble highs.

    So if you have a lot of cash up front, you can get in on the high end and you’ll be happy with your monthly payment compared to renting (probably gaining). But the giant lump of cash up front is still too high compared to historical norms. An interesting trade-off decision.

    For me, as a renter looking to buy, I wouldn’t mind the ‘risk’ of lost mobility, if it weren’t for sinking my whole nest egg into a potentially declining market. What if I have to sell sooner then I plan to? It’s a big risk.

    I need another 10-15% drop in prices, with interest rates held steady, or alternatively, if I saw a 25%-30% drop in prices, but interest rates headed back up to say, 6%, I’d also consider it worth buying.

    If interest rates ever rose, I might get some price drop (contrary to CR’s analysis – only because we are at SUCH low rates right now).

    Still waiting…

  6. Greg FieldingGreg Fielding

    Don’t expect rates to rise much anytime soon. As bad as our economy is, the rest of the world is far riskier. Bernanke has already signaled short-term rates will stay near zero for at least a couple more years. As without short-term yields rising, I don’t see why the 10-year yields would.

    Expect continued low rates, tepid demand, and probably limited supply of the foreseeable future.

  7. A. Lewis

    I agree on the rates, Greg – no indication rates will rise for the next 3 full years. The thing to watch I guess would be if for some reason general inflation rose past 3-4%. Then Bernanke might pull rates up from zero by a little bit. But the current dynamic seems to be a lot of advanced signalling to give all the financial folks lots of time to plan and react.

    And I currently don’t expect general inflation above 2% or so. (Exception: the price of oil could easily spike over the next 3 years, I make no predictions there.)

    So although it might personally benefit me, I am not holding my breath for a change in mortgage rates, or any subsequent change in home prices b/c of it. Ask me again in 3 years.

  8. Greg FieldingGreg Fielding

    For the last decade there have been talking heads blabbering about inflation. But it hasn’t really happened and I don’t expect it to any time soon. We’ve been in a deflationary cycle.

    Inflation isn’t rising prices – rising prices are a symptom of inflation. Inflation is the growth of the supply of money – made up of cash and debt, and deflation is the shrinking of the money supply. With so much money being destroyed through write-downs, foreclosures, and bankruptcies, they’ve had to keep the printing presses running just to keep up.

    Weirder still, the things that have generally gotten more expensive can be blamed more on policy than inflation – think housing, energy, college, health care, and corn (ethanol subsidies). Moreover, the money that is being “created” by banks is being lent back to the Government instead of actually entering the public money supply. Does this money even really count?

    I trust inflation data as a measure of prices, but not as inflation. Because, “inflation” implies that wages are rising at the same pace, which simply isn’t happening.

    Real inflation – even healthy, low inflation – won’t happen until a heck of a lot more bad debt has worked it’s way through the system.

    It’s safe to say we are maybe half way through the foreclosure mess. Commercial foreclosures haven’t really started yet. And, student loan debt is going to get written off one way or another.

    And then there is all the $$$ that will disappear as Europe explodes.

    We’ve got a lot more deflationary pressure ahead of us.

  9. Tom Stone

    I work primarily in Western Sonoma County and expect to see prices go down this year in the under $$500k and $500k-$800k price tiers. Quite a few people stretched too get into good neighborhoods and their resources are now exhausted. I can see quite a few by going to Foreclosure Radar and hear more anecdotally. Quality will count more and more as time goes by. Quality of the neighborhood, the lot, the design and the construction. Decent stuff, solid 3/2′s on an acre a little farther than the optimal distance from town will be about $400k by august. I see REO right now just a little higher than this now (5116 Blank Rd 95472) and with distressed properties setting the market price it is likely to only take a few months.

  10. Jay Wiedwald Post author

    A. Lewis – Permit me to give a bit of advice. It sounds like you may be guilty of something that I was (correctly) accused of in my working years: analysis paralysis.

    Your choice is to buy or not buy, a binary choice (although the “when” is probably the real issue). From an academic standpoint the data you would like to see would be wonderful, but at what level of detail would you be satisfied that you made the “best” decision?

    Buying a home is certainly a big decision, but absent extreme circumstances (the mid 2000′s bubble qualifies in spades), it’s really more of a life-style choice than a financial one.

    A home purchase is unavoidably a financial investment, but it’s primarily a choice of how you want to live your life.

    That said, it seems that besides a basic level of confidence the issue of job mobility is at the forefront. For most of the past, a home in an urban area could be counted on to be salable at a “fair” price. Then we entered a period when instead of “fair” we expected nothing short of a goodly gain. Now I think that we’re pretty close to fair again, but we may have to lower our expectations to accept that.

  11. Jay Wiedwald Post author

    Tom – One of the data sets that I look at is Alameda County RE loans as a whole, so unfortunately I can’t easily localize the various situations.

    But one thing that I saw just last night, and this really surprised me, is that there has been a sudden shutdown of borrowers entering FC (even NOD’s) and/or short sales.

    I hope to publish on it over the weekend, but as things stand now it will consist of more questions than answers.

  12. Tom Stone

    Thanks Jay, I look forward to it. I have already seen more REO hit the market this year than all of last year in the Sebastopol area. The Broker’s tour is tomorrow and 2 of 6 listings are priced to sell. Both are regular sales in the $500-$700k range and are about $25k below what they would have sold for last august. I think these are equity sellers getting out while they can.

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