The Realities of Real Estate: Taking a closer look at housing affordability


When someone is contemplating the purchase of a house, the first question they usually ask themselves is probably “Can I afford this?” But affordability can be defined in many ways.  The primary consideration for most people is the price of the house. However, a complete assessment of affordability will include several other factors. Chief among them would be the buyer’s income and mortgage interest rates.

Since the purchase of a house is a big ticket item that for most people requires them to borrow money to  purchase, the rate of interest they must pay in return for the loan will substantially affect what they can afford. To better understand housing affordablity in 2010 it is important to compare the factors that affect our current affordability (prices, interest rates and income)  to historical trends. Since 1970 the National Association of Realtors has compiled an index that tracks housing affordability. In 1970 the Housing Affordability Index stood at 147. It’s hard to comprehend the numbers back then, but at that time the national median price for a single family home was $23,000, the prevailing mortgage interest rate was 8.35% and the median family income was $9,867. Imagine living on less than $10,000 a year? Of course, in 1970 a first class stamp cost six cents, a gallon of gas cost 36 cents and a new car cost $3,900, and unlike today, the unemployment rate was 3.5 percent.

Now, lets fast forward to 2010. Suprisingly, the Housing Affordability Index is now at 175, a fair amount above the 1970 level of 147. At a time when it seems as though no one can afford a house, what accounts for the improvement in this index? Well, although the national median home price is now $165,700 and the median family income has risen to $60,498, the mortgage interest rates are below 4.5%, which is historically the lowest rates have been. It is this factor that affects dramatically how much someone can afford when buying a house.

Why then isn’t the current housing market not experiencing a new vitality? The simple reason is the current economic recession has left most people feeling uneasy about making such a financial commitment.

But,  if you are someone with the financial means and a longer  term vision, the current high level of housing affordability might make this a unique opportunity to make a great buy!  Don’t get too caught up in all the endless predictions of what the future might bring to the real estate market. Do what makes sense for you and your family.

The Law Office of William J. Reinhardt, Jr. is available to represent purchasers and sellers on real estate transactions in New York and New Jersey. I may be reached by phone at 718-377-8880 or by e-mail at bill@billreinhardtlaw.com.


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