So I started thinking that most of these FTB’s today are likely doing the same thing I did. They go to the bank and are told how much they can borrow. But today because of changes to both interest rates and amortization periods, the amount one can borrow has increased substantially. The chart below illustrates this.
So today someone with 10% down can easily buy a home worth six times their income whereas back in 1989 you were limited to about 2.5 times your income. If the 1989 family was able to save 10% of their income ($10k per year) and apply this annually to the mortgage, they could pay off their mortgage in just over ten years, but it will take over 20 years for the 2009 family to pay off their home. If the first family after paying off their mortgage continued to contribute the same amount into a retirement fund earning only 5%, they would have over $475,000 saved in the ten years while the former family was still paying off their mortgage.
This whole thing got me thinking that maybe we can explain most of the housing bubble through mortgage lending changes, so I pulled together an analysis of average income levels in 1989, 1999 and 2009 with mortgage lending practices and average house prices to see if there was a correlation. Results are shown below.
Amazingly the increase in SFH prices over the past twenty years is highly correlated to the maximum mortgage being made available to average families. This analysis aligns with what the greatest real estate investor I know once told me which was always to buy real estate when interest rates are at their highest levels because prices will always be lower.
Today many people that could not have qualified for a SFH because of their income levels, now can with these ridiculously low interest rates. This has increased the pool of buyers and resulted in a mini sales boom for entry level homes. It appears to be almost predictable.
Smart money will wait for interest rates to rise as this will both decrease the number of buyers in the market while simultaneously putting pressure on people renewing their mortgages at higher rates as others have well documented on this blog.
Looks like I plan to become a FoRenter as this is what smart people are doing.