Think residential real estate is expensive? Compared to past decades, houses remain affordable.
September 13, 2021
3 min read

There’s no denying that since the pandemic began, there’s been a buying frenzy in many U.S. housing markets. According to Redfin, July marked the twelfth straight month of double-digit price increases. In July, 60% of offers written by Redfin agents faced a bidding war – down from 74% in April. Media headlines call the current housing boom “unprecedented.” So, here’s a surprising fact: By some measures, houses are actually MORE affordable today than in decades past.

Home Sale Prices Up 16% From 2020

That may seem absurd, until one dives into the details. For instance, according to data from Freddie Mac, the average mortgage in the U.S. in 1975 was $35,100. Wow, you say, if only my mortgage was as cheap as a Subaru! Today, the average mortgage through the 2nd quarter was $337,410 – nearly 10X the 1975 cost. No question, the cost of a home has risen dramatically since 1975. But so has the price of everything else – cars, groceries, clothes, concert tickets, you name it. The price of nearly everything we consume has risen over time – as you know, it’s called inflation. Personal Income, of course, also rises along with inflation. Once we adjust housing prices for inflation, the numbers tell a different affordability story.

And keep in mind that price is just one aspect of a home’s monthly cost. The mortgage rate on a loan is a major factor contributing to affordability. In the 1980-1990 period, mortgage rates ranged between 10%-13%. Compare that to today’s prevailing rates of under 3%. 

Below is a chart from Mountain Place Realty. 

Are Houses Less Affordable Than They Were in Past Decades? | Simplifying The Market

The Mortgage Amount listed above is the median sales price at the end of the 2nd quarter as reported by the Fed. It assumes a 10% down payment. Historical mortgage rates reflect the monthly 30-year fixed rate for June of that year as reported by Freddie Mac. P&I reflects the monthly principal and interest on the loan. An inflation calculator is used to determine the payment, after it’s adjusted for inflation.

As you can see, when adjusted for inflation, there were only two periods in the last 45 years when buying a home was more affordable than today – 2015 and 2010. And of course, 2010 prices reflect the post-2008 housing market where huge blocks of homes sold at major discounts. It’s not surprising that houses were more affordable after the housing crash. But what is surprising is that affordability – adjusted for inflation — is nearly the same today!

Now, we’re referencing median home prices in the above chart. It would be a stretch to call today’s hottest markets – think Austin, TX; Raleigh, NC; and Boise City, ID to name a few – affordable.

But there are less “glamorous” cities, towns and neighborhoods that remain relatively affordable. Especially if you don’t have to commute every day to a top ten U.S. metro area like New York, San Francisco or Washington D.C. And of course, this is increasingly true for tens of millions of Americans in the new remote work normal.

Cities like Detroit, Cleveland, Memphis, Baltimore and Rochester have seen housing price appreciation but remain a value compared to the hottest real estate markets. And suburbs like West Irondequoit, NY; Manchester, NH; Brentwood, NC and Lincoln Village, OH still offer housing affordability for those willing to venture further from the bigger metro areas.

“These affordable markets are not necessarily any less competitive than many others around the country. The crucial difference is price point,” says Arpita Chakravorty, a Zillow Economist. “In some of these cities home values are up almost 20% from a year ago, which are some of the highest growth rates in the country and not far off from what we’re seeing in places like Phoenix or Austin. But even with the strong appreciation in the markets on this list, they remain among the least expensive large U.S. metros in terms of home prices overall.”

The surge in remote work is allowing millions of potential homebuyers to look at cities and neighborhoods that were never on the map before because they needed to commute to big city jobs. That’s making homes in “2nd tier” cities in the Midwest and South, with thriving downtowns and sustainable economies, some of the best places to buy a home – and invest in real estate.  

The bottom line: Don’t be deceived by headlines proclaiming how expensive houses are. It’s competitive most everywhere, but if one is flexible and able to rethink where real estate value is today, there are still attractive markets. And in addition, adjusted for inflation, and given today’s low interest rates, the typical house may be just as affordable as the one your mom and dad bought in the 70s or 80s. 

Steve Sapourn
Steve Sapourn

Steve Sapourn is an active real estate investor, Aloha Capital’s co-founder, and portfolio manager. At Aloha, Steve has overseen more than 1300 real estate investor loans in 35 states. He has managed alternative investments in a variety of asset classes for over 25 years. He has deep experience in designing low-risk portfolios that reliably outperform benchmarks. Over his career, Steve has served as portfolio manager for a Fund of Funds, where he analyzed hundreds of alternative investment strategies. In addition, he has developed and implemented quantitative trading strategies in the futures, stock, and volatility markets. Steve’s long and diverse career benefits Aloha’s investors.