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Strategies & Market Trends : Mish's Global Economic Trend Analysis
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To: John McCarthy who wrote (94490)2/21/2009 1:08:36 PM
From: JBTFD  Read Replies (2) of 116555
 
My point was that to get a more accurate picture you would have to compare median income to the debt service at the prevailing interest rate.

Rates have dropped a whole lot since the 1980s, so all other things being the same a person with the same income could afford a lot more house.

For example, interest on a $300,000 loan is going to be $36,000 a year at 12%. (which in the mid 80s was not uncommon) Interest on $300,000 at 5% is $15,000 a year. Another way to put it is that $36,000 a year can service the interest on a $720,000 mortgage at 5%. Same interest amount but because interest rate is lower you can buy a lot more house. (I'm not including the amortization purposefully to keep the math simple. If amortization was added in it would make the higher mortgage amount at the lesser rate a little more expensive comparably)

So to leave out the effect of the large drop in interest rates we've seen over the last 28 years is just delusional in my opinion.
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