Purpose of This Analysis
The purpose of this presentation is to illustrate the relationship between household income, home price levels, and mortgage loan interest rates. Prospective home buyers should understand the relationship between these three variables because they raise a key point that is not typically understood by most people who purchase a home.
The three pillars interact in ways that are not immediately obvious. A home may appear affordable based on price alone, yet be financially untenable when the current mortgage rate is applied against the buyer's household income. Conversely, a home that appears expensive on paper may be justifiable when interest rates are sufficiently low. Understanding the interplay between these three variables is the foundation of prudent residential real estate analysis.
1989 vs. 2013 — A Tale of Two Markets
According to the U.S. Census Bureau, median household income was $52,250 in 2013 and $30,056 in 1989. Over the same period, the median new home price rose from $120,383 in 1989 to $265,092 in 2013. At first observation this appears alarming — home prices inflated at 120% while household income grew only 74%. However, the dramatic difference in the national average 30-year fixed mortgage rate between the two periods — 10.32% in 1989 versus 3.98% in 2013 — fundamentally changes the analytical conclusion.
Why All Three Variables Must Be Analyzed Together
The central lesson of this analysis is that raw home prices — in isolation — do not tell the complete story of housing affordability. A home priced at $265,092 in a 3.98% rate environment is materially more affordable than a home priced at $120,383 in a 10.32% rate environment, when measured against contemporary household income levels.
The ACM analytical framework measures affordability through two lenses simultaneously: the Justified Income Percentage (the share of gross household income consumed by the mortgage payment at the prevailing rate) and the Justified Mortgage Rate (the rate at which the current home price is exactly affordable at the 28% income threshold). Both metrics are required to reach a definitive conclusion about whether any given market is fairly priced, overpriced, or underpriced.
Download the Full Analysis
The complete Housing Analytical Methodology report is available below as a PDF. The report presents the full case study with charts, data tables, and the complete ACM analytical framework for assessing residential real estate affordability.
