Everyone needs a break from cooking, and going out is the answer. But it is far more expensive than it used to be. A meal that cost $10 in 2000 has more than doubled since then, rising to $24 today. A Disneyland ticket in 2000 cost $41, compared to $169 during the summer and $224 on weekends in late June and July 2026. A grande vanilla latte at Starbucks has climbed from $3.05 in 2000 to $5.45 today, a 79% increase. How about the monthly cost of streaming on Netflix? It has ballooned by 150% from $7.99 in 2011 to $19.99 today, rising by $2 since last year alone. Inflation has made everything more expensive, but some costs have risen far beyond the overall rate of inflation.
Similarly, housing costs have risen sharply, straining home affordability and impacting buyer demand. In looking at home affordability, it is not just prices. It is essential to consider mortgage rates, home prices, and incomes. Mortgage rates have been much higher than where they are today, but that does not mean it was more unaffordable. In 1980, the average mortgage rate was 13.75%, the median income was $18,000, and the median detached sales price was $108,000. That meant the monthly housing payment was 69% of the median household income. Rates continued to drop, and incomes climbed decade after decade. In 2000, mortgage rates were at 8%; the median income had more than doubled since 1980, rising to $42,000; and the median detached sale price climbed to $216,000. Yet, the monthly payment was only 36% of the median income.
By 2006, just before the Great Recession, the monthly payment had ballooned to 68% of the median household income as prices soared by 167% in just six years. By 2012, prices had dropped by 43%, mortgage rates had plunged from 6.41% in 2006 to 3.66% in 2012, and incomes had grown by 4%. Home affordability improved dramatically, and the monthly payment for the median-priced home was only 27% of income. Homes remained affordable through 2020, just before the run-up in home values during COVID.
During the pandemic, home values surged from $673,000 in 2020 to $849,410 by 2022, a 26% increase. Incomes only rose by 10%, yet mortgage rates jumped from 3.11% to 5.33%. The combination of substantially higher home prices and rapidly rising mortgage rates significantly squeezed home affordability. In response to high inflation, which peaked at 9% in June 2022, the Federal Reserve raised the Federal Funds Rate 11 consecutive times from March 2022 through July 2023. By 2022, the monthly payment for the median-priced home jumped to 55% of the median household income. In 2023, with rates at 6.81%, that share increased to 60%. By 2024, it reached 62%. Today, with rates falling to 6.51% and incomes outpacing the rise in home prices, affordability has slowly improved. The monthly payment for the median-priced home has dropped to 51% of the median household income.
Affordability remains the number one obstacle to homeownership for many prospective buyers, and it continues to show up in buyer demand, which has remained muted and virtually unchanged since 2023. Current demand (a snapshot of new pending sales over the prior month) is 3,957. At the end of May last year, it was 3,855. In 2024, it was 3,972, and in 2023 it was 4,011. By comparison, the 3-year average before COVID (2017 to 2019) was 5,990 pending sales. That is an additional 2,033 pending sales, or 51% higher than today.
Buyer demand will remain muted until affordability improves. If
mortgage rates drop back down to 6%, where they were at the end of February,
and incomes continue to rise by 5% per year, the payment will drop to 46% of
the median household income. If rates dropped to 5.5%, the payment would fall
further to 44%. Improving affordability would strengthen demand and push it
above levels seen in recent years. The frozen Los Angeles County housing market
would begin to thaw, resulting in many more pending sales and, ultimately, more
closed sales. Until then, affordability will remain the primary obstacle
preventing many prospective buyers from purchasing a home.
