The chart below shows one measure of housing affordability over time by displaying the monthly mortgage payments (adjusted for inflation) for a median-priced new home (Census data here) financed at the prevailing 30-year mortgage rate in each month back to January 1978, assuming a 20% down payment.
Payments today for a $234,500 median-price new home purchased in March with a 20% down payment and a 3.95% fixed-rate 30-year mortgage would be $890.23. Average monthly mortgage payments have been below $900 for the last eight months going back to last August, and the March payment is about 33% below the average of $1,334 per month over the last 33 years.
The incredible housing affordability today seems to be an under-reported and under-appreciated story, although that is probably a major factor in the home sales rebound in recent months, especially in April as I have been predicting. As I reported previously, I'm suggesting that the incredible affordability of housing has to counteract and offset some of the "gloom and doom" about younger generations being worse off than their parents, stagnating income, increasing income inequality, the necessity of a dual-earner household to survive financially and the dangers of inflation. During the decade of the 1980s, average monthly mortgage payments according to this measure were $1,627 (in 2012 dollars), almost double the average payment today of $890.
On an annual basis, the increased housing affordability today translates into more than $9,000 in savings compared to the 1980s, which is the same as a $9,000 average increase in household income. In the 1990s, the average monthly home payment was $1,224, and that would translate into annual savings today of $4,000 at the $890 monthly payment in March.
Bottom Line: The incredible affordability of housing today, with low interest rates and flat home prices, will be a major factor in the housing sector's rebound this year. In many markets, it's becoming cheaper to buy than rent, and we can expect increased home sales in 2012 as homebuyers take advantage of the greatest period of housing affordability in a generation.
Update: The assumption of a 20% down payment is NOT critical to the analysis, and neither is the assumption of a median priced home. The chart below shows the original payments from above (blue line), plus the monthly payments on a house priced at 50% of the median priced home, assuming a 5% down payment (red line). The downward trend for the second set of assumptions follows the exact pattern of the original assumptions. The size of the down payment doesn't affect the analysis, and neither does the assumption about whether the homes are median-priced, or some fraction above or below the median price.