The Home Prices of Today vs Prices of Yesteryear

Anyone with grandparents has heard tales of $5000 homes, of entire mortgages totaling but a fraction of today’s smallest down payment, of stand-alone single-family homes that may cost half a million dollars today that first sold for less than the average high schooler’s first vehicle. But what did these seemingly miniscule home prices mean compared to the average income of that time? Lenders today would be wise to educate themselves on historical home prices in comparison to household income, as these figures show trends in past years and could serve to predict trends in years to come.

In the past 20-30 years, home prices have risen in comparison to average household income. As the graph below from The Economist shows, home prices compared to household income are significantly higher than they were in the 1980s, although they have on average dropped since the infamous housing bubble burst in the late 2000’s.

As shown in this illustration, home prices rose above the long-term average (red line) in the early 2000s. When the housing bubble grew and eventually burst, borrowers saw home prices compared to income drop closer to the long-term average, but in the last few years they have risen once again.

In today’s world, median household income in the United States gets borrowers further than they did roughly 10 years ago, but depending on regional differences they can still be searching for extra pennies to make that mortgage work with their monthly paycheck. In the below graph from Advisor Perspectives, the median income clearly comes in below several areas in the US. Of course, lenders should always account for specific local average incomes, but this gives the industry a good look at what borrowers are dealing with in different markets around the nation.

As home prices increase faster than household incomes, the average borrowers profile is also changing. Where young families in their mid-20s could easily afford reasonably-sized homes 50 or even 30 years ago, today’s young adults have a much more difficult road ahead of them. The average homebuyer today is 44, whereas in 1981 average borrowers were younger than 34. Lenders need to become familiar with these housing market trends to know their target market and properly serve their borrowers.

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