Cheap Mortgages Are Hiding the Truth About Home Prices


Cheap Mortgages Are Hiding the Truth About Home Prices

At first blush, home buying looks quite affordable right now. New data from real estate website Zillow (Z) show that if a person earning the median income of $52,513 buys a home at the median price of $157,400, he would spend just 12.6 percent of his income on mortgage payments. That’s more than one-third less than the prebubble averages, when a mortgage on a median-priced home would cost about 20 percent of a median income.

Seems good, right? But that affordability is masking a problem—houses are overvalued. From 1988 through 1999, median home values averaged 2.6 times the median annual income. As the bubble kicked into gear, prices pushed up to almost four times income. With the crash, that ratio has come down—but not far enough, largely because incomes have been stagnant, if not declining, in recent years. Home values are now at three times the median income—that’s 15 percent higher than they have historically been, relative to what Americans earn.

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