If you bought a home in 2002 for $400,000 your payment was approximately $2,661 not counting taxes and insurance.   Interest rates were 7%.  Today, in Boulder County if that house appreciated at the average rate that same house can be purchased for $465,000.  Based on today’s interest rates of 4.75%, your new payment would be $2,453.  A savings of roughly 8% per month.

When buyers are considering a home purchase, purchase price is fairly arbitrary unless they are paying cash.  Purchase price is the answer to a series of questions about how much a buyer can afford on a monthly basis.  The general rule of thumb for payment  affordability is 33% of gross monthly income.  Say for example a family earns $6,000 per month.  Their total payments towards housing should be around $2,000.  This figure should include principal, interest, taxes, insurance and HOA fees if any.  Assuming no HOA fees and interest rates of 4.75% the qualifying purchase price will be around $335,000.

Let’s complicate things a bit by bringing inflation into the mix.  Since 2002, inflation has averaged 2.35% per year.  Since 2002 homes have appreciated in Boulder County on average 1.8% per year.  All things being equal homes today are a better value than they were 9 years ago.  But all things are not equal.  In 2002 interest rates were 7% and now they are 4.75%.  If you put these two factors together the home that sold in 2002 for $400,000 and now is worth $465,000 is 27% more affordable than it was in 2002! Buyers are getting much more bang for their buck now than they have for years.

This anomaly cannot last forever.  Values will rise and home affordability as measured by a percentage of take home pay will decrease.  Read this post for a related idea on why now is not only a great time to buy but a smart time to sell and buy.

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