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Housing affordability hits worst level in 37 years

Housing affordability hasn’t been this bad since Ronald Reagan was president.

It now takes 35.51% of the median household income to make a principal and interest payment on the median home with 20% down, according to figures mortgage technology and data provider Black Knight shared with Yahoo Money.

That’s the highest payment-to-income ratio since October 1985 when it took 36.01% of household income to make that payment. Just in January, that ratio was 24.61%, below the long-term average of 25.1%.

The figures come after the rate on the 30-year fixed mortgage hit 5.89% last week — its highest point in over a decade and over 2.5 percentage points higher than the start of this year— and underscore the troubling outlook for Americans chasing homeownership.

“The record low interest rates we’ve seen over the last two and a half years have really allowed home price growth to significantly outpace income growth,” Andy Walden, Black Knight vice president of enterprise research, told Yahoo Money. “Now all of a sudden when rates are rising back up towards their long-term norms, we’re seeing a lot of pressure felt from an affordability standpoint.”

Housing prices outpace income levels

Though signs of a softening prices have popped up across the country, for many buyers, homes still remain out of reach.

The typical home price fell 0.77% from June to July, according to a recent report from Black Knight, marking the largest month-over-month decline in home values posted since January 2011 and the second-largest July decline on record.

The median national home price declined to $435,000 in August, down from $449,000 last month, Realtor.com data showed.

Robin Azougi 1st R, a licensed real estate salesperson with Douglas Elliman Real Estate, talks with prospective buyers at a house for sale in Floral Park, Nassau County, New York. (Credit: Xinhua/Wang Ying via Getty Images)
Robin Azougi 1st R, a licensed real estate salesperson with Douglas Elliman Real Estate, talks with prospective buyers at a house for sale in Floral Park, Nassau County, New York. (Credit: Xinhua/Wang Ying via Getty Images)

Still, home price growth remains historically strong. For context, in the mid-1980s, the average home price was equal to 3.5 years of median household income. In June, the average home price was equivalent to 6.4 years of median household income.

To return to the normal 25% payment-to-income ratio would take major changes, Walden said.

"We're pretty significantly out of balance right now,” Walden said. “It would take some combination of a 40% rise in incomes, roughly a 3-percentage-point decline in 30-year rates — getting closer to that low 3% range — or a 30% pullback in home prices”

Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.

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