Housing Affordability Surprisingly Strong

Mike Cooke July 12, 2017 Buying Market Trends Selling

Housing Affordability Surprisingly Strong

Home prices in metro Denver are off the charts … literally. They have never been higher.

The average single family resale home in metro Denver was $441,172 in 2016. Go back 40 years to 1976 and it was $39,740! A third of that increase has come in just the last five years.

As we’ve noted previously in other blog posts, large jumps in value cause concerns about bubbles and affordability. Affordability is a crucial topic and its one we’ve been tracking since 2014, within two years of the beginning of this strong seller’s market.

In the past, we’ve provided insight on affordability numbers produced by others. We provided a combination of national affordability data combined with spot checks of affordability specific to metro Denver.

Recently, we raised the bar. Colorado Home Realty completed two independent studies on affordability that;

1.Are specific to the seven-county metro Denver residential real estate market and
2. Systematically cover a time span of more than four decades. Detailed results will be released soon, but here is a brief overview:

  • Study No. 1: We looked at the inflation-adjusted payment for principal and interest required to buy the average priced single family home going back to 1974. We used the prevailing Fannie Mae interest rate for each year and assumed a 10% down payment. Actual payments in years prior to 2016 were adjusted for inflation using the Consumer Price Index from the Bureau of Labor Statistics.

In 2016, the P&I payment on the average single family home at 10% down and 3.65% on a $441k purchase price was $1,816 monthly. This is close to the inflation adjusted average P&I payment over the last 43 years, which was $1,744. Today’s home buyer is making a house payment that is within 4% of the long-term historic norm.

  • Study No. 2: We analyzed P&I payments for a given year as a percentage of average income for that year. Again, we assumed a 10% down payment and interest rates that prevailed in the year in question along with average price in each year to compute the payment. Per capita annual income data were obtained from the St. Louis Federal Reserve.

The results show that a house payment in 2016 consumed a smaller percentage of income than it did in 32 out of the last 43 years.

The full studies will be released soon, but we wanted to give you a preview of the results we obtained. Stay tuned for additional details.

By Mike Cooke Principal/Employing Broker

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