Home Affordability Isn’t The Challenge Some Are Claiming It To Be

Published:
February 23, 2022
Last updated:
April 8, 2022
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It’s no secret that home prices have soared over the recent past, especially in certain markets across the US. The high cost of buying a home could be a hurdle for many Americans, but the headlines we’re seeing about a dearth of home affordability shouldn’t deter you from getting into the real estate market.

Buying a home might sound like an insurmountable feat, but is it really? In this article, we’ll show you that despite the high cost of a home purchase, housing affordability may not be as big of an issue as you may think.

Home Prices Are Still On the Rise

Home prices have increased at a healthy rate over the past year. According to real estate research firm Zillow, home prices have increased 20.3% across the nation over the past 12 months. These price increases don’t seem to be letting up.

The rapid rate of home price appreciation continues to be driven by tight housing inventory compared to the heavy demand from homebuyers. That said, this summer saw a greater supply of homes available for sale, attracting prospective buyers who were willing to pay hefty prices.

While much of the country is seeing significant gains in home prices, Idaho, in particular, has seen some of the biggest increases. From April 2021 to April 2022, home prices in the state increased by a whopping 28.1%.

Boise has been especially hot over the past couple of years, contributing largely to Idaho’s overall rate of home prices increases. Over the past year, Boise’s home prices have skyrocketed 24%.

The real estate market has been an anchor for the national economy throughout the health crisis. While many industries suffered greatly throughout the past couple of years, the housing market has remained strong.

Mortgage Rates Rising

Mortgage interest rates may be relatively low compared to years earlier, but they are rising.

After hitting rock-bottom in January 2021, rates have been on a steady incline. During the week of January 7, 2021, the 30-year fixed-rate mortgage rate dropped to 2.65%, according to Freddie Mac.

Since then, rates for 30-year mortgages have bounced back and are now around 4.72%. The rate for 15-year fixed-rate mortgages and 5/1 ARM mortgages are around 3.91% and 3.56%, respectively, as of this writing.

Rates are upticking lately, largely due to rising inflation and consumer spending. Homebuyers would be well-advised to pay attention to how mortgage rates are behaving, as they’ll have a direct impact on the size of monthly mortgage payments and the overall cost of a home loan.

To illustrate what a difference just 1% makes on mortgage rates, consider a $400,000 mortgage on a 30-year fixed-rate home loan:

At 3.5% interest rate: $1,796 in monthly mortgage payments

At 4.1% interest rate: $1,933 in monthly mortgage payments

You would spend $137 per month more in mortgage payments if rates increase by just 0.6%.

Today’s Mortgage Rates

The Truth About Current Home Affordability

Given the soaring home prices we’re now seeing, many might assume that buying a home is out of reach. However, that’s not the case.

Sure, homes come with a higher price tag today compared to a few years ago. That said, it’s important to consider other factors that determine whether or not homes are more or less expensive than years past.

The prices of goods increase over time. That’s just simple economics. Not only do home prices increase as time passes, but so does just about everything else, including food, gas, and clothing, among other things. This is all due to inflation.

In terms of housing, the actual price of the dwelling is only one factor in monthly housing costs. It’s also important to understand the role that the mortgage interest rate plays.

Let’s illustrate by looking at home prices over the years, adjusting for inflation:

DateMortgage AmountMortgage Interest RateP&I (Principal & Interest)Monthly Payments in Today’s Dollars
1980$57,60012.71%$624$2,058
1990$114,12010.16%$1,015$2,110
2000$146,8808.29%$1,108$1,748
2010$197,5504.74%$1,029$1,282
2020$290,3403.16%$1,249$1,311

As you can see, it may actually be more affordable to buy a home today compared to decades earlier, predominantly because of mortgage interest rates. Today’s rates are far lower than they were many years ago, and as such, monthly mortgage payments reflect that.

Interestingly, it’s more affordable to buy a home today than it was back in 1980, despite home prices being much higher.

The takeaway point here is that you shouldn’t be afraid to get into the real estate market because of rising home prices or inflation. The truth is, it’s actually more affordable to buy a home today than it was decades ago.

Homeowners Build Their Own Wealth Instead of Their Landlords’

You could rent, but why pay your landlord’s mortgage when you could be putting your hard-earned money towards your own home equity?

Consider how much you spend on rent year after year. Then, consider how much of that rent could have been dedicated to paying down your own property.

There are tons of reasons to own instead of rent, but perhaps the biggest advantage of homeownership is the building of wealth through home equity. Not only can you accumulate equity with every monthly mortgage payment you make, but you can also build equity through appreciation.

Over time, the value of your home increases significantly. In the US, home prices have increased more than 91% over the past 10 years. Not only do you have a place that you can call home as an owner, but you also own an asset of value that greatly contributes to your overall wealth.

While there may be certain obstacles for some Americans when it comes to getting approved for a mortgage, many continue to rent with the misconception that their monthly financial obligations would be much higher as homeowners. However, renting may often prove to be just as expensive as owning.

For instance, the average rent in the US is $1,295 for a 2-bedroom unit. Now, let’s see what the monthly mortgage payments would be to buy a home at today’s national average price of $331,533.

If you put 10% down and took out a 30-year fixed-rate mortgage with a rate of 3.1%, your monthly mortgage payments would be $1,270. That’s actually a bit lower than what you would be paying in rent.

The difference, however, is that a big chunk of your mortgage payments is going towards paying down the principal portion of your mortgage, and ultimately towards the equity in your home. On the other hand, 100% of your monthly rent payments are going towards paying your landlord’s mortgage, leaving you with zero in terms of equity and wealth at the end of the day.

Tips for Making Home Buying More Affordable

While buying a home today may not necessarily be more expensive than decades earlier when mortgage rates and inflation are put into perspective, as discussed, it’s still a costly transaction. How can homebuyer hopefuls alleviate the financial burden of buying a home?

Here are a few tips to help make purchasing a home more affordable:

Improve your credit score

Your credit score directly influences the mortgage rate you’ll qualify for. A lower rate means lower monthly mortgage payments and a lower overall cost to your mortgage. Take some tips to give your credit score a boost (if needed) to ensure you get the lowest interest rate possible on your mortgage.

Compare lenders and loan terms

Take some time to shop around for a lender that can offer you the best terms for your mortgage to keep costs down.

Look for low down payment options

Some mortgage programs allow for smaller down payment amounts than others. For instance, FHA loans allow buyers to put down as little as 3.5% on a home purchase, though you’ll need to have a healthy financial and credit profile to get approved for this low amount. Keep in mind that a lower down payment may ease home affordability at first, but your monthly mortgage payments will be higher.

Put away a portion of your monthly income

Dedicate a percentage of your paycheck to saving up for a down payment. To make things easier, set up automated savings to eliminate the need to manually save.

Buy a fixer-upper

You can save a lot of money on a home that needs some TLC. Any work you do to the home after the fact will add instant equity and boost its value.

Start with an entry level home

You might have a ‘dream home’ in mind, but it may be financially out of reach for you right now. If so, consider getting into the market with a starter home and eventually work your way up to a home that checks off all the boxes.

Why Choose a Sammamish Mortgage?

At Sammamish Mortgage, we can help you find the perfect home loan product to get you into a home of your own. The process starts with getting preapproved for a mortgage, so you can shop available homes on the market with confidence.

Sammamish Mortgage has been in business since 1992, and has assisted many homebuyers in the Pacific Northwest. If you are looking for mortgage financing in Washington State, we can help you get pre approved. Sammamish Mortgage offers mortgage programs in Colorado, Idaho, Oregon, and Washington.

Contact a loan officer if you have any mortgage-related questions or concerns. If you are ready to move forward, you can view rates, obtain a customized instant rate quote, or apply instantly directly from our website.

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