How many weeks does a mortgage cost?
Now that the housing bubble has ended and America is becoming a nation of renters again, I figured it was time to see out just how much housing costs have varied over the recent decades. While house prices are quoted as the purchase price in dollars, most people take out a mortgage and borrow the money, then they pay the mortgage by working. That means that the real cost of a house for most people is in time spent working. With a little online searching I dredged up the median cost of a new or used house, the average interest rate on a 30 year mortgage and the average weekly earnings of a non-management employee.
My numbers came from FRED, the economic statistics search engine provided by the St. Louis Federal Reserve. I was able to find annual data from 1964 to 2015. Using the median price of a house and the average interest rate, I computed the monthly mortgage payment. I multiplied the payment by twelve and divided the result by the average weekly earnings of private sector production and non-supervisory employees. That’s oversimplifying things, but a lot of people work in the private sector and are not in management. I did the calculations and plotted the result:
It’s an interesting graph. It shows a number of things.
Buying a house was cheaper back in the 1960s. It took about 15 to 20 weeks of work to pay the mortgage. That seems to be reflected in the old rule about spending 1/3 of one’s earnings on housing. Then came the late 1970s when house prices soared and interest rates rose. Even rising wages didn’t help much. The Federal Reserve continued to raise interest rates to fight inflation into the 1980s. (I had a friend with a 20% mortgage rate.) The cost of buying a house doubled, ranging from 35 to 40 weeks. There was no way to afford that on a single income. Women joined the workforce and stayed in the workforce. Stay at home mothers became less common, and more children spent there days in child care. (Anxiety about this probably drove many of child abuse cases of the era. Some of them involved underground tunnels, murderous clowns, animal sacrifice and satanic rituals.)
The recession in the early 1990s drove down interest rates, so buying a house was more affordable that decade with the cost ranging from 25 to 30 weeks. No wonder people tend to look back at that decade as the good times. It wasn’t the 1960s, but home ownership was relatively affordable, wages were actually rising again, and the stock market was booming. This continued into the new millennium, though the stock market crash and collapse of the first internet bubble wasn’t fun.
Surprisingly, the housing bubble barely registers on this graph. House prices were going up, as were interest rates, but wages were rising too. Overall, the cost of a house went up, but only to 32 or 33 weeks of labor. That was the high point. Since the crash, the cost has been much lower, from 20 to 25 weeks. That’s more than the 1960s, but not by all that much. If you ignore the fact that housing is less affordable than ever, housing is more affordable than ever. What’s going on?
To be honest, I was surprised by this myself. I expected to see the housing bubble as a big spike on this chart and the final range to be much higher. After all, houses were expensive during the bubble, and a lot fewer people are buying houses now. I’m not sure why my this chart didn’t capture this.
One possibility revolves around wages. Those weekly wages are for those employed full time. It’s harder to get a full time job these days. The 1930s was a great decade if you had a solid full time job. Wages might have been stagnant, but prices were low and sometimes falling. Also, those wages are an average, not a median, and wages have been diverging with the middle range vanishing.
There’s also the fact that house prices are higher in high wage areas. They aren’t the same all over the country. If anything, the gradient is even more extreme now. Moving to an area with better jobs means paying much more for housing. It’s harder than ever to come out ahead.
I’m open to other theories. If I come up with something, I’ll update this post. I seriously hope we are not going to look back at this current lost decade and think of it as the good times.
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DATA SOURCES
Average Weekly Earnings of Production and Nonsupervisory Employees: Total Private — https://research.stlouisfed.org/fred2/series/CEU0500000030
Median Sales Price of Houses Sold for the United States — https://research.stlouisfed.org/fred2/series/MSPUS
30-Year FHA Mortgage Rate: Secondary Market — https://research.stlouisfed.org/fred2/series/FHA30
30-Year Fixed Rate Mortgage Average in the United States — https://research.stlouisfed.org/fred2/series/MORTGAGE30US
NOTE: I smooshed the last two databases together to get my interest rate. The older FHA series ended mysteriously.
