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Twenty Years Later, Buying a House Is Less of a Bite

By DAVID LEONHARDT
and MOTOKO RICH
Published: December 29, 2005

PORTLAND, Me. - Despite a widespread sense that real estate has never been more expensive, families in the vast majority of the country can still buy a house for a smaller share of their income than they could have a generation ago.

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Alexandra Daley-Clark for The New York Times

Marjorie and Tim Gilbert bought a house in Maine for $176,000 this year by taking out two mortgages.

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A sharp fall in mortgage rates since the early 1980's, a decline in mortgage fees and a rise in incomes have more than made up for rising house prices in almost every place outside of New York, Washington, Miami and along the coast in California. These often-overlooked changes are a major reason that most economists do not expect a broad drop in prices in 2006, even though many once-booming markets on the coasts have started weakening.

The long-term decline in housing costs also helps explain why the homeownership rate remains near a record of almost 69 percent, up from 65 percent a decade ago.

Nationwide, a family earning the median income - the exact middle of all incomes - would have to spend 22 percent of its pretax pay this year on mortgage payments to buy the median-priced house, according to an analysis by Moody's Economy.com, a research company.

The share has increased since 1998, when it hit a low of 17 percent before house prices began rising sharply in many places. Although the overall level has reached its highest point since 1989, it remains well below the levels of the early 1980's, when it topped 30 percent.

"This is a good deal - a good, fair price," Dale Ruttenberg, a 53-year-old bar manager said of a tan one-bedroom bungalow, with a remodeled kitchen and finished hardwood floors, that he is buying for $211,000 after having rented in Portland for most of the last decade. "Within a couple hours of being here, it was like, 'I'm home.' "

In high-profile places like New York and Los Angeles, home to many of the people who study and write about real estate, families buying their first home often must spend more than half of their income on mortgage payments, far more than they once did. But the places that have become less affordable over the last generation account for only a quarter of the country's population.

Elsewhere, families tend to spend far less on housing. In Dallas, the share of income needed to buy a typical house has fallen to 13 percent this year, from 14 percent in 1995 and 31 percent in 1980. In Tampa, it has dropped to 21 percent, from 26 percent in 1980. Even in New England, where the soaring prices of the last decades have frustrated many young families, house values have still not reached the heights of the early 1980's, when calculated as a share of income.

"Over 20 years, affordability has definitely improved because interest rates are much lower," said Kenneth T. Rosen, chairman of the Fisher Center for Real Estate and Urban Economic Research at the University of California, Berkeley. Houses have also grown bigger during that time, he said, so people are getting more for their money.

Here in Portland, a smaller version of the big-city real estate boom has been in full swing until just the last few months. House prices have jumped since 2000, hundreds of new real estate agents have gotten their licenses and an old factory along the waterfront, once famous for making bright-red hot dogs, is set to be replaced with condominiums.

With many suburban houses now selling for $300,000 and up, young families have a much harder time buying their first home than they did a few years ago. Still, housing has been less expensive this year - as a share of local incomes - than at any point during the 1980's, according to Moody's Economy.com.

Beyond cost, many families who simply could not have bought a house 10 or 20 years ago find themselves able to do so, thanks to changes in the ways banks lend money. In the past, a home buyer often needed to make a down payment equal to 20 percent of a house's value to get a mortgage; today, little or no down payment is common.

The most money that Tim W. Gilbert has ever had in his possession was $15,000, he said, in the form of a check for a job he had done as a carpenter. But he and his wife, Marjorie, were still able to buy a 1936 Cape Cod-style house this year for $176,000 in Poland, about 45 minutes north of Portland.

They took out two mortgages rather than making a down payment and they use Mr. Gilbert's $5,000 or so in pretax monthly income to cover $1,600 in mortgage, tax and insurance payments. Ms. Gilbert, a writer, home schools their daughters, ages 4 and 6. "I paid rent for 18 or 19 years," Mr. Gilbert, 38, said. "We waited years and years. We wanted to make this happen."

David Leonhardt reportedfrom Portland, Me., for this article and Motoko Rich from New York.
Twenty Years Later, Buying a House Is Less of a Bite - New York Times
The New York Times Real Estate
Skip to article

Twenty Years Later, Buying a House Is Less of a Bite

Published: December 29, 2005

(Page 2 of 2)

If almost anything had been different - if interest rates had been higher or if the bank had required a down payment - the Gilberts would still be living in an apartment underneath a loud landlord, Mr. Gilbert said. Instead, their house sits on three acres, and they get their tap water from the same source as the Poland Spring Water Company.

"We're making this work," he said. "It doesn't mean things are a lot easier, but finally we are in control. It's been a long time coming."

The Moody's Economy.com calculations took into account the decline in down payment size in recent years. But even though these lower down payments mean home buyers are taking out loans equal to a larger share of a house's price than in the past, monthly payments have remained reasonable in much of the country.

The sharp fall in mortgage rates - from above 10 percent through most of the 1980's to less than 6 percent in the last few years - is the main reason. Upfront mortgage fees have also dropped to about a third of a percentage point of a loan's value, from 2.5 percent 20 years ago. Computers have made lenders more efficient, and huge pools of global capital have brought more competition to a business that was once largely local.

But when the list prices of houses are climbing as they have in recent years, it can be hard to imagine that real estate is more affordable than it once was. In a nationwide New York Times/CBS News poll conducted this month, 75 percent of respondents said they thought most families in their community spent a larger share of their income on housing now than in the 1980's. Only 5 percent said the share was smaller.

One possible reason for the perception is that many families have recently taken on mortgage debt to pay for items other than housing. Some have folded higher interest loans, like credit card debt, into their mortgage, said Mark Zandi, chief economist at Moody's Economy.com. Others have used home equity loans to pay for a new car, tuition or even a vacation.

This has caused mortgage payments to rise over the last generation - especially among high-income families, according to Federal Reserve data - for reasons besides the cost of housing.

But the monthly payments needed to buy a house still seem to be dictating people's behavior, if not their perceptions. The number of home sales has reached a record this year, according to the National Association of Realtors. In the Times/CBS poll, 90 percent of respondents said they were satisfied with their homes.

"People aren't really shopping prices," said Bill Trask, a broker at Coldwell Banker Friends and Neighbors Realty in suburban Portland. "They're shopping payments."

Christopher Muncie recently bought his first home, a 1,000-square-foot condominium with a sunken living room and exposed beams in Portland's West End, for $169,000. It is part of a house built in 1838; a similar apartment in the building sold for $81,000 in 1990, according to real estate records.

That increase starts to look less striking, though, when viewed in light of family incomes that have grown more than 50 percent in Portland over the same span and interest rates that have fallen nearly in half.

"I walked away thinking I'm getting a bargain," said Mr. Muncie, 36, a psychologist. "I was actually pleasantly surprised."

The median-earning family in the Portland area would need to spend about 23 percent of its pretax income on mortgage payments for a typical house this year, down from about 27 percent for much of the 1980's. But it is up sharply from the low of 16 percent reached in 1999, and some people here said the cost of housing has become onerous again.

With mortgage rates having inched up in recent months, houses are taking longer to sell, and asking prices have dropped. Homes that would have sold for $300,000 this summer are now selling for about $285,000, said Rita Yarnold, president of Bay Realty.

The market has also slowed in California and most other places where housing costs have risen far more rapidly than in Maine. In New York, the median-earning family would have to spend about half its income on the mortgage payments for a median-priced house, up from a third of its income in 1985. That will act as a drag on house prices in coming years, many economists say.

"When you get affordability stretched so much, all the creative financing in the world can't stop some correction of house prices," Mr. Rosen, the University of California economist, said. "It happened in Hong Kong, Japan and England."

It looks as if it may not happen, though, in most of the United States.

David Leonhardt reportedfrom Portland, Me., for this article and Motoko Rich from New York.