December 29, 2005
Twenty Years Later, Buying a House Is Less of a Bite
By DAVID LEONHARDT and MOTOKO RICH
PORTLAND, Me. - Despite a widespread sense that real estate has never been more expensive, families in the vast majority of the country can still buy a house for a smaller share of their income than they could have a generation ago.
A sharp fall in mortgage rates since the early 1980's, a decline in mortgage fees and a rise in incomes have more than made up for rising house prices in almost every place outside of New York, Washington, Miami and along the coast in California. These often-overlooked changes are a major reason that most economists do not expect a broad drop in prices in 2006, even though many once-booming markets on the coasts have started weakening.
The long-term decline in housing costs also helps explain why the homeownership rate remains near a record of almost 69 percent, up from 65 percent a decade ago.
Nationwide, a family earning the median income - the exact middle of all incomes - would have to spend 22 percent of its pretax pay this year on mortgage payments to buy the median-priced house, according to an analysis by Moody's Economy.com, a research company.
The share has increased since 1998, when it hit a low of 17 percent before house prices began rising sharply in many places. Although the overall level has reached its highest point since 1989, it remains well below the levels of the early 1980's, when it topped 30 percent.
"This is a good deal - a good, fair price," Dale Ruttenberg, a 53-year-old bar manager said of a tan one-bedroom bungalow, with a remodeled kitchen and finished hardwood floors, that he is buying for $211,000 after having rented in Portland for most of the last decade. "Within a couple hours of being here, it was like, 'I'm home.' "
In high-profile places like New York and Los Angeles, home to many of the people who study and write about real estate, families buying their first home often must spend more than half of their income on mortgage payments, far more than they once did. But the places that have become less affordable over the last generation account for only a quarter of the country's population.
Elsewhere, families tend to spend far less on housing. In Dallas, the share of income needed to buy a typical house has fallen to 13 percent this year, from 14 percent in 1995 and 31 percent in 1980. In Tampa, it has dropped to 21 percent, from 26 percent in 1980. Even in New England, where the soaring prices of the last decades have frustrated many young families, house values have still not reached the heights of the early 1980's, when calculated as a share of income.
"Over 20 years, affordability has definitely improved because interest rates are much lower," said Kenneth T. Rosen, chairman of the Fisher Center for Real Estate and Urban Economic Research at the University of California, Berkeley. Houses have also grown bigger during that time, he said, so people are getting more for their money.
The market has also slowed in California and most other places where housing costs have risen far more rapidly than in Maine. In New York, the median-earning family would have to spend about half its income on the mortgage payments for a median-priced house, up from a third of its income in 1985. That will act as a drag on house prices in coming years, many economists say.
"When you get affordability stretched so much, all the creative financing in the world can't stop some correction of house prices," Mr. Rosen, the University of California economist, said. "It happened in Hong Kong, Japan and England."
It looks as if it may not happen, though, in most of the United States.
David Leonhardt reportedfrom Portland, Me., for this article and Motoko Rich from New York.
Amazing what you find when you venture West of the Hudson or East of La Cienega!