Basically, I’m looking to see how much, if any, the ratio has changed between the cost to buy a home and how much average people make.
How many years have people worked to pay for their houses over time? It seems like 5 to 10 years of wages is a normal cost of a house in parts of this country, but has it always been so?
Real Estate people will be by later.
But, I have purchased several homes, but I’ve never actually ever paid one off. I currently have 3 and live in one. So I will watch for the real answer.
Home affordability will vary greatly depending on your location. But yes, median home prices typically fall in the range of 5-7x median per-capita income.
Median Sales Price of Houses Sold for the United States (Federal Reserve Economic Data)
Personal income per capita (Federal Reserve Economic Data)
Those figures may skew the ratio to the upper range a bit. The per capita income figures cited include homeowners and non-homeowners. The per capita income of homeowners only may be a bit higher. Wikipedia says:
How much? No clue, can’t find a cite.
In the 1950s, it was taken as a hard rule of thumb, that one should pay 25% of income for housing. Anybody that paid more than that was putting on airs, and every job paid enough that adequate and dignified family housing could be found with monthly rent of a weeks pay.
For home ownership, the guideline was essentially the same – you could afford a house if you had a week’s pay to cover the mortgage payments
In the UK there is a wide spread between the North and the South.
In the North current is between 3.5 and 4.5
In the South (outside london) 12 or 13 is typical.
This is much the same as in 1997.
In London it was about 12 in 97 and 32 last year.
In a Boomer’s lifetime, we (US) have:
Gotten used to paying more for a car than our parents paid for the houses in which we grew up.
(I remember when $50K would buy a large house in the nicest part of our town.
Have gone from needing one income to live in anything other than abject poverty to requiring two.
About mid-70’s, when women started to show up in the OFFICE (not school or hospital, where they belonged), the bidding war for housing began in earnest. Within 20 years, damned few people could afford a decent house on solely one income.
The mean house price in San Francisco just passed the $1mil mark - you DO make $3mil/ year, right?
So much for “pay no more than 30% for PITI”.
Wut? There is so much wrong with this it must be a whoosh?
Anyway, the historical average house price to average yearly income ratio was about 2. In the housing boom and reboom of the last 14 years the ratio increased to 4, leading to all the economic woes we all know?
From this I deduce that you’re white, male, come from a reasonably wealthy family, and/or are under 64 years old, since for most people, that was never the case, particularly the “every job” bit. The 1950’s is far from the golden era that people make it out to be – personally, I’d much rather live in the “Great Recession” than in the economics of the 1950’s.
OOOOPps - the rule was house price no more than 3 years salary, so SF is a bargain if you make over $333,333.33/year.
Not “need 3x house price”. Losing it.
I do remember buying a new Gremlin (yes, it WAS a piece of crap, but a cute one) for about $2K.
I was living cheap in Concord CA while saving for a down payment. The high-density sneeze and everybody in the building hears you apartments across the street went condo at $60 - $80K (1 or 2 bedroom) those went about nowhere, and an up-and-coming tech whiz could buy one on a single income.
It is only because I was living next door that I remembered those. See Laguna and Detroit in Concord CA for cheap housing in the SF area. I don’t know what happened to that mess down 280 at Hickey? just south of DC and above 380 - built with utility poles as uprights and painted green. Lovely.
Was at the intersection of a busy Interstate and a 4-lane feeder from earlier developments.
The other two sides were cemeteries (yes, Colma). I can’t imagine those doing much better, but being closer to SF, they are probably out of the single-income range.
This is irrelevant. People make much more money. This is why the OP asked about a comparison with wages. I would look at total compensation, not just wages.
This is from memory, but reasonably accurate. My parents bought their first house for $7500 in a moderately tony neighborhood in suburban Philly (Bala Cynwyd) in 1945. My father made (estimated) $4000. They sold it a year and a half later for $10000 and moved back to the city (there were family reasons, which in retrospect, I find unconvincing) and bought a house that cost about $5000, but had been badly neglected and required a few thousand to bring up to scratch, so say $8000. My father probably made about $5000. We lived there until 1955, by which time my father was on salary of $125 a week, say $6500. They sold it for something like $12000 and bought a house in the suburbs for $13500. But my grandfather had died and my grandmother moved in with us, paying part of the down payment. At any rate, they had never paid more than 2 years salary. They sold that house in 1967 for about $15000 and bought another for $19000 that was sold two years later, after my father died, for $26000.
Now my experience. The first house I bought was a one-storey prefab that I paid something like $12000 for, when my salary was about $10000 in 1966. I sold it at no profit two years later and moved to Montreal where I lived in a rental for four years. In 1972, I bought my second house, which I am still in 42 years later, for $31800. House prices were depressed by continual political upheavals, but there was no way it could have sold for over $40000. My salary was $17000 and I had just been promoted to full professor. This year the house was assessed at $790000 from which I can suppose it will sell for between $750000 and $800000. A newly promoted full professor makes about $80000, so there is no way he or she could buy my house. Who is buying these houses? Beats me. But it helps to have two incomes. To me it seems that that is the only explanation.
Here are those two charts combined.
One thing the above does not take into account is interest rate fluctuations. It’s easier to afford a more expensive home in the current low-IR environment than it was in the early '80s, when the interest rate was above 10, 15%.
I was married and wife was stay home mom in 1976, I bought home for 55,000 about 5 times my income. Now the same house is going for about $600,000 about 9 times what my income was when I retired.
When I retired in Ohio, I sold my house there for about USD 160,000, which was about two times my income prior to retirement. I moved back to Australia, to live in the house that I’ve owned here for more than 30 years. I bought that house for AUD 52,000, but I don’t remember what my salary was at that time. Now it’s worth about AUD 700,000, going by recent sales in the same street, i.e., about 7 or 8 times my pre-retirement income.
(I.e., houses in most of the big cities in Australia are a lot more than similar houses in similar cities in the U.S., but salaries are not correspondingly larger for most people.)
It is almost impossible to compare apples to apples. An average house in 1950 was something like 1100 sq ft. Today, an average house is around 2500 sq ft. People thought one bathroom in the house was fine, and kids lived two to three per room. That’s just not acceptable today for most people.
This is a few years old, but it has a graph that should be enlightening. Just google with the following words “historical house price to income ratio” to get lots of graphs.
That’s true as can be. My first house, purchased in 1978, was a Cape Cod with only 960 square feet on the ground floor and a limited second story having around 200 square feet usable space. It had two bedrooms, a single bath and asbestos shingle siding. It cost $24,800, which was slightly more than twice my annual salary, 2.02 times to be precise.
My last house, purchased in 2009 was a two story brick with 2750 square feet, three bedrooms and two and a half baths. It cost 2.57 times my annual salary, so on the face of it seemingly more, but much more house for the money.
Several things -
Nowadays, in general both spouses work. The market has adjusted to account for this extra income, so house prices are higher simply because people can afford more. Usetobe is right - our concept of “good life” requires two incomes or one really good one - but this is because there are so many more thing to buy. When I was a child (60’s) a phone was under $10 a month, and so was cable. No cell phones. Unless you were some prissy hi-fi expert, you had a moderately good stereo and if you were lucky, a colour TV. No DVD, no VHS, certainly no computer, internet, or smart phone. About 1970, IIRC, a VW Beetle went for about $2,000 and minimum wage was bout $1/hr.
The other factor bumping up prices today is low interest rates. The question is not “what can you afford?” but “what payment can you afford?”. With good mortgages I the neighbourhood of 3%, “what the market will bear” is a lot higher.
I see another factor, which I know worked for me. I bought an old home many years ago for $50,000 - then when I moved, sold it for $175,000. I’d paid off the mortgage long ago; heck, my new car when I moved cost more than that and I paid cash. I had some decent savings, having no mortgage for over a decade. I bought my new house for close to half a million, but I owe les than $200,000 on it. I suspect a lot of the upper end homebuyers are in the same boat - they are trading in their increased equity to trade up on their old house to a much better one, but not assuming anywhere near the full cost as debt. (Of course, this is the Canadian market. I understand thinks are a lot more in flux down south) Those who have this tradeup option drag the price up for everyone else.
I recall the very old rule that you should pay 25% of income for a house. Invert that with the assumption that the first few payments are almost all interest on a 25-year (typical) mortgage, and that says for example - a person making $40,000 should pay $10,000 a year for a house. That’s $800 a month, which if interest is 3% is $320,000; if interest is 5%, $192,000. I’ve also recall it going up to 33% and never really sure if they mean gross or take-home; plus the suggestion that in extreme markets (Toronto, Calgary, Vancouver) it might be 50%.
The other point is that many newer houses are a step above the tiny boxes you could buy decades ago, not to mention finishing amenities. Municipalities like big houses, they pay big taxes. I don’t recall seeing many new under-1,000sq.ft. fully detached houses for sale, but drive around the very old, less affluent neighbourhoods, and they built a lot of those during the war. So it’s a bit of an apples and watermelons comparison.
This.
We all buy houses on the monthly payment. We sell them on the price. So folks who bought at a high interest rate era and sell at a low interest rate era can make out real well, all else equal.
This also cuts the other way. There are a lot of middle management / minor executive class houses out there in US suburbia selling now for $400-800K. And being bought for those prices but financed at 3-4%. When mortgage interest rates return to a more typical long term average of 6-8% the payments will become unaffordable for the vast majority of would-be next buyers.
The shape of the income distribution is pretty steep at that income level. There are a lot more two-earner couples who can swing a $500K mortgage at 4% than can at 8%. Like probably 3 or 5 times as many.
When interest rates tick up enough and the supply of would-be buyers for those McMansions shrinks by 60-80%, a lot of folks are going to be stuck holding white elephants.
Color me real glad I got rid of mine two-plus years ago.