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The affordability of homes for buyers is determined by the relationship between the median home price and three main factors: mortgage rates, monthly mortgage payments as a percentage of income, and home prices.
Home affordability is a major talking point in the housing industry, especially now, with home values and mortgage interest rates on the rise. This begs the question–what makes reasonably priced homes affordable to one buyer but not necessarily affordable for another? And are homes still inexpensive today? Well, to understand this, it is important to go over the three fundamental factors that go into determining how reasonably priced homes are for buyers. Thus, to better assist you, here, discussed below are those factors and how they play a role in home affordability.
When we look at housing, price is just one component that makes up the monthly cost of the home. For instance, another key factor is the mortgage interest rate at the time of purchase. But let’s not get ahead of ourselves just yet. You may have noticed that there are more than few headlines about how housing affordability is declining. The headlines are correct: it is less affordable to purchase a home today than it was a year ago. However, it is important to give this trend context. Is it less expensive to buy a house today than it was in 2005? What about 1995? What happens if we go all the way back to 1985? Or even 1975?
Obviously, the price of a home has appreciated dramatically over the last 45 years. So have the prices of milk, bread, and just about every other consumable. Prices rise over time – we know it as inflation. Moreover, recent data from Freddie Mac clearly shows that when adjusted for inflation, there were only two times (2010 and 2020) in the last 45 years that it was less expensive to own a home than it is today. That said, the last past year definitely put an emphasis on the importance of one’s home. As a result, many people made the jump from renting to homeownership while others began to re-evaluate their current house and consider a move to one that better fits their current lifestyle and needs.
Understanding how housing affordability works and the main market factors that impact it may help those who are ready to buy a home. And in order to narrow down the optimal window of time in which to make a purchase, these three main factors that go into determining how affordable single-family homes are for buyers should always be taken into consideration:
These three main factors, when compared to each other, determine how affordable homes are for buyers. Even if interest rates rise to five percent or twenty percent, or home prices dip ten percent or double in price, the percentage of income it takes to purchase a home based on these factors will always remain the same. That said, the National Association of Realtors (NAR) produces a Housing Affordability Index. In order to provide this critical data, NAR takes these above-mentioned factors into account and determines an overall affordability score for housing.
The NAR Index, in essence, measures whether or not a typical family earns enough income to qualify for a mortgage loan on the average home at a national and regional level—this is based on the most recent price and income data. In the simplest terms, if the index is above 100, it means that the median-income family has more than enough income to qualify for a mortgage loan on a median-priced home, assuming a 20% down payment. So, the higher the index, the more affordable it is to purchase a home. Here is a graph of the index going back to 1990:
As you can see, the blue bar that represents today’s affordability illustrates that homes are more affordable now than they have been at any point since the housing crash when distressed real estate properties (foreclosures and short sales) dominated the market. Those properties were sold at large discounts not seen before in the housing market for almost one hundred years.
Although there are three factors that drive the overall equation, the one that is playing the largest part in today’s home buying affordability is historically low mortgage rates. Based on this primary factor, it is more affordable to buy a home today than at any time in the last eight years.
Of course, for many, buying a home as an investment may seem risky, particularly if you are taking on a big purchase without a down payment. But the fact is that home purchases today are typically less expensive than making other types of investments. When you calculate the total price of your home plus any down payment necessary, including:
The cost of homeownership generally comes in below what many people think it does. Moreover, with a home, you truly get what you put into it. Thus, once the mortgage is paid off, your investment is more often than not worth more than what you paid for it and becomes a nice little safety net or asset.
So, if you are considering purchasing your first home or moving up to the one you have always hoped for, it is important to understand how affordability plays into the overall cost of your home. With that in mind, buying while mortgage rates are as low as they are now may save you quite a bit of money over the life of your home loan.
Ultimately, if you want to buy a home, do not let the headlines about affordability discourage you. You most likely cannot get the deal your friend got last year, but you will get a better deal than your parents did 20 years ago and your grandparents did 40 years ago. So, if you feel ready to buy, purchasing a home this summer or fall may save you a significant amount of money over time based on historical affordability trends.
Are you curious about mortgages or need assistance navigating the current real estate and housing market? If so, Sammamish Mortgage can help. We are an online mortgage company from Bellevue, Washington, serving the entire state, as well as Oregon, Idaho, and Colorado. We currently offer many mortgage programs and financial services to buyers all over the Pacific Northwest and have been doing so since 1992. Contact or call us today with any questions you have about mortgages.
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