With today’s 30-year, fixed-rate mortgages averaging a bit less than 3.5 percent, people can afford much more of a house than ever before. (And I mean that — ever. These are the lowest mortgage rates in US history.)(I also speak from experience; I could never afford my house at six or seven percent.)

How much more house? According to Tim Iacono of Iacono Research, at 3.3%, an $1,100 per month mortgage payment can buy a $280,000 house. (Yes, that’s ballpark and doesn’t take into account other factors — PMI, insurance, etc.)

But when rates were around 6.5%, that same payment could only buy a house for around $190,000. Quite a difference, to put it mildly.

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Iacono doesn’t like it, but I don’t follow his logic.

Should 30-year mortgage rates drop to 2.5 percent – something that, somehow, seems quite possible in the year ahead – that same $1,100 mortgage payment will finance a home purchase of about $310,000 and, at 1.5 percent, it works out to be over $350,000!

This is starting to sound a lot like those 2005-era stories of people with $50,000 incomes buying $500,000 houses. How you end up there is much different (liar loans and interest-only loans versus super-low mortgage rates), but the underlying instability that this sort of financing creates is not all that different. (Emphasis mine.)

It’s not all that different? Actually, it’s completely different. People who got subprime or “liar” loans were counting on their homes going up in value — they were expecting the bubble to keep expanding. When that didn’t happen and their adjustable-rate mortgages reset, then they couldn’t afford the payments and/or couldn’t get out of the loan.

But today lenders are much more careful (by choice or by law), so people spending $1,100/month at 3.3% aren’t going to see that payment change. There’s no ARM to adjust, and no balloon payment on the horizon. They aren’t counting on values to go up.

Besides, you could apply Iacono’s logic to any mortgage rate: “At 9.5% people can afford much more house than they could at 15.5%. That’s going to lead to trouble!”

In fact, the future is brighter for those who buy at low rates. They’re also buying at or near the market bottom, so their homes’ value will increase. And even if it didn’t, it doesn’t matter — as Iacono himself points out, people buy based on the affordability of the monthly payment. If they can afford a more expensive home thanks to lower rates, more power to ‘em.