Home affordability is a function of effective purchasing power. In order to measure effective purchasing power, it is necessary to consider household income, mortgage interest rates, property tax expense and typical mortgage loan availability and terms. This affordability graph assumes a home buyer with the median household income in Flathead County with a 25 percent down payment and a 30-year home loan at the average interest rate for that year. The property taxes and insurance expense are estimated based on 1.5 percent of the median home price.
Using these variables, it is possible to estimate how much a family with a median household income can afford to pay for a home in Flathead County each year and compare that to what the actual home prices have been over the last 20 years.
This graph shows that home affordability and prices were pretty well matched from 1998 to 2004. In 2005 the recent housing bubble started to develop, then topped out in 2007 with the start of the recent housing crisis. During that period, the median home price got completely out of line with what was affordable to the typical home buyer. Flathead home prices didn’t return to an affordable range until 2009 and 2010. Since that time, actual home prices have pretty well matched what is affordable in Flathead County.
Mortgage interest rates are a key player in what is affordable and they have been at near-record lows of around 4 percent over the last five years. When those rates start to increase, they will drive down home affordability and could slow the housing market. The bad news is that home prices are rising faster than the affordability index.
The good news is that this is the Griz/Bobcat rivalry week and I project a Griz win. Now that is affordable by any standards.