A Thousand Bucks Buys You a Lot of House Right Now

Posted Sunday, November 25 2012

The chart below shows the increasing amounts of money you're able to borrow on a 30-year fixed rate mortgage with a $1,000 payment since 1971. I've been meaning to create this chart since I saw Matt Yglesias' post last month on the buying power of $1,000 over the last few years. As you can see, the trend isn't new. The amount that $1,000 buys you (in 2012 dollars) with a 30-year fixed rate mortgage has grown from roughly $64,000 in 1981 to $226,000 last month!

Of course the high rates of the early 1980s were as much of an anomaly as low rates are today. But even compared to the 6-8% 30-year mortgage rate range that prevailed in the 1990s, $1,000 still buys you about $75,000 more now.

But there's a limit to how far left we can move on the chart below. The 30-year fixed was 3.38% last month. I wouldn't have imagined it could ever get that low, but certainly we won't ever see 1% or even 2% rates. There really can't be much more oomph left in the price stimulus provided by falling mortgage rates.

Which brings me back to this chart of Case-Shiller real home prices and the financing cost of Case-Shiller real home prices that I showed a couple of months ago.

We've seen a huge drop in real home prices since 2005 and have only recently found a floor and stabilization. But when you look at the payments on homes purchased with borrowed money (the blue real borrowing cost line), the cost in terms of a monthly mortgage payment continues to decline because mortgage rates continue to hit new lows. In terms of the monthly mortgage payment, homes cost less than they ever have for the history of the Case-Shiller series. Truly, $1,000 buys you more home than it has in quite a while. You know, assuming you can get a mortgage.