Is Housing Still Affordable in the U.S.? Depends On How You Look At It…

Rising home prices have left many prospective first-time buyers suffering from sticker shock. Despite frequent talk of the bubble bursting in the near future, droves of potential owners are downright baffled by the market’s relentless growth. How high have prices escalated?

The average price of a new home in the U.S. in 1980 was $76,400, according to the National Association of Home Builders. Last year, the price had shot up to $274,500. That’s more than 350 percent, if you’re keeping score. Why has this happened?

The explanation may be simpler than you think — houses have gotten much, much bigger.

• A QUARTER-CENTURY AGO, according to U.S. Census data, the average home was 1,740 square feet, with three bedrooms or less, and two bathrooms or less. About 25 percent of the new houses built in 1980 had no garage, and 33 percent lacked any kind of air conditioning.
• LAST YEAR, the average new home buyer purchased 2,349 square feet of living space, with at least three bedrooms and two-and-a-half bathrooms, in addition to a garage that holds at least two cars. Some 90 percent of homes purchased included air conditioning.

Not only are today’s new houses bigger in terms of square footage, they have more volume. Nine-foot ceilings have quickly become the norm, and the homebuyers of the 21st century are demanding separate rooms as media centers and home offices. New houses are built with higher-quality materials, along with central air, top-of-the-line security systems and broadband wiring. All of which contributes mightily to the rise in prices.

Rising wages and increased buying power are pushing prices higher, as well.

“Home prices over the long run tend to grow — not at the rate of inflation — but instead at the rate of income growth, which, over time, is above the rate of inflation by usually about 1.5 to 2 percentage points,” according to David Berson, a Fannie Mae economist.

A period of remarkably low mortgage rates has allowed home prices to go up even faster than income growth. When you compare it to the average 1980 mortgage — at what now seems like a stunning rate of 15 percent interest — the cost of buying a home is less than half what it was then. There are still plenty of wannabe homeowners who feel priced out of the market, yet based on overall buying power and affordability, housing is as cheap as it’s been in two and a half decades.

TAKING A LOOK AT THE AVERAGE COSTS

Let’s say you and your spouse are a typical couple who have saved a year’s earnings to use as a down payment on a new home. That down payment will leave you with a $247,044 mortgage these days, while 25 years ago, a down payment of a year’s salary would subsequently result in a mortgage of just $63,920. Oh, the good old days… or were they?

The typical buyer in 2004 probably financed the purchase with a 30-year fixed-rate mortgage at 5.5 or 6.0 percent, leaving them with monthly payments of $1,400-$1,500. In other words, about 2.7 paychecks of $528, the average weekly wage. For our 1980 homebuyers, the $808 monthly payment on the average 30-year, fixed-rate mortgage (at 15 percent interest) would have burned through 3.4 checks, with weekly wages averaging only $240.

Therefore, after buying their house in 1980, Mr. and Mrs. John Q. Homebuyer were left with $54 a week (or about $123 adjusted to 2004 dollars) to pay for everything else. Taxes, food, gas, clothes, school. The works. The family budget these days has several hundred dollars a week to spend after the monthly mortgage payment is made.

NO SIGN OF SLOWING DOWN

Analysts say that although they see no signs of a slowing in this trend toward bigger and bigger homes, at some point it has to level off. No signs of that happening are apparent right now, however, as Americans depend more space, better ammenities, and high levels of overall comfort. We may never see the day when the average person lives in a 20,000-square-foot house, but we have a long way to go before we hit the personal maximum.

The one force that most experts agree could slow the swelling of American homes? The rising cost of energy.
A prolonged rise in energy prices took a toll on expansive, poorly insulated homes in the late ’70s and early ’80s. Such residences, often dubbed “white elephants” by owners forced to sell at below-market prices, pushed many Americans to the financial brink. Higher energy costs then sparked a major industry initiative to improve efficiency. Improvements in design, materials and building standards, as well as more efficient appliances and heating / AC systems soon hit the open market.

But, as houses get bigger and consume more and more power, more and more energy is used, thus causing demand and prices to soar. According to Brian Castelli, executive vice president of the Alliance to Save Energy, this is an opportunity that private citizens and builders must both take to develop new energy conservation methods.

“I think people are going to be pushed to do more as houses are getting bigger and ceilings are getting taller. They’re going to see bigger bills unless they start to design those homes to be much more energy efficient and use more energy efficient appliances … for the fifth TV or the third computer,” Castelli said.

Even as the size of the average American family shrinks, homes are still getting bigger and better appointed. Analysts say the reason is simple — new home buyers are demanding more space and better amenities than previous generations.

Locally, Florida housing costs have more than doubled in some areas, with new constructions leading the way. If you know anything about real estate, you know that if someone demands it, builders will always be there. Unless priorities change, the Florida real estate market will remain high-priced… but maybe not as high as that huge price tag suggests. By utilizing more creative mortgage options and tax write-offs, first-timers can still live the dream.