UH OH! Home Affordability Is Down (or Is It?)

UH OH! Home Affordability Is Down (or Is It?)

Home Affordability Is At The Lowest Level In 10 Years?

With the recent news that home values are soaring, many people (both buyers and sellers) wonder if housing values will price them out of the market for their next home.

Because home values are increasing so rapidly, it has been reported that home affordability has been on the decline. While it is true that home affordability has seen its lowest numbers in a decade, as always, it is important to find the proper perspective.

Home affordability is the lowest it has been, relative to the past ten years.

home affordability

The Impact Of Distressed Properties

But what happened in the real estate market in the last 10 years?

We had the crash, which saw the market flooded with distressed properties. As a result, these distressed properties also brought down the values of surrounding homes.

During these years, the market was dominated by distressed properties:

home affordability

This allowed buyers in the market to buy homes at a discounted price, whether the property was a distressed home or not. This made homes more affordable.

So, naturally, as home values increase, they become less affordable.

However, if you look back further than just the period of time since the crash, you get a better perspective and see things for what they really are.

Here’s a look at the Home Affordability Index going back to 2000:

home affordability

While that Index is lower than it has been in the last 10 years, it is still higher than it has been at any time prior to the crash.

Home Affordability: Mortgage Payments Lowest In Nearly 30 Years

Another component of Home Affordability is the average monthly mortgage payment.

home affordability

Although the Average Monthly Mortgage Payment has been on the increase over the last 5 years, the last 5 years have seen the lowest Average Monthly Mortgage Payments since 1990.

Even today, a home is more affordable than it was in the 15 years prior to the crash.

Mortgage payments are currently well below the historic average over that time period. Plus, home buyers are not overextending themselves to buy a home like they did on the run-up to the housing crash.

Lawrence Yun, the Chief Economist of the National Association of Realtors (NAR), recently explained in a Forbes article:

“Even though home prices are climbing far above people’s income, exceptionally low mortgage rates have permitted people to buy a home without overstretching their budget.

For someone making a 20% down payment, the monthly mortgage payment at today’s mortgage rates would take up 15% of a person’s gross income.

During the bubble years, it was reaching 25% of income. The long-term historical average is around 20%.

Therefore, a middle-income household does not need to overstretch their budget much if at all to buy a typical home.”

home affordability

Factors Working For Buyers

There are several factors that are keeping home ownership affordable for most people. One is that interest rates remain low, still close to their historical lows.

In fact, the average annual mortgage rate in 2016 was the lowest rate recorded in the history of Freddie Mac, going back to 1971 when they first started tracking rates:

home affordability

Over the first few months of 2017 we saw interest rates creep up, but they have dropped down to below 4% again.

home affordability

Of course, eventually they will go up again. When and how much we don’t know, but here are the latest forecasts:

home affordability

Rising interest rates and rising home prices can certainly put a damper of the plans of home buyers. But first it is important to keep perspective.

Even if rates go up, they are still very low when you look at the average interest rates by decade:

home affordability

Even if rates go up to 5% this year, that likely won’t have a big negative impact on demand:

home affordability

The Mark Fleming quote brings up another factor working for buyers in this market: increases in jobs and wages. These are helping to offset rising home prices, keeping homes affordable.

home affordability

Will rising rates and prices scare off buyers? It seems the perception would be worse than the realty.
home affordability

For now, consumer confidence in the economy remains high, which is an important underlying factor.

home affordability

Buyer confidence is certainly something to keep an eye on going forward, but buyer demand currently is very strong.

home affordability

Home Affordability: Buying Is Still Cheaper Than Renting

If buyers are concerned about rising rates and rising prices leading to higher mortgage payments, they should consider the alternative: rising rents.

The hot real estate market doesn’t just apply to homes for sale, it also applies to rentals.

If you think a slightly higher mortgage in 6 months is intimidating keep in mind that once you are locked into a mortgage, your monthly housing payment remains the same for the next thirty years.

Do you think your monthly rent payment won’t go up in a year? History says otherwise:

home affordability

Bottom Line

Home affordability is down, but only relative to the last 10 years. A big reason for that decline is the fact that distressed properties had a big influence on the real estate market, but that is no longer the case.

Rising home values and the threat of higher interest rates could have an impact on buyer demand, but an increase in jobs and wages are helping to offset that in the current market.

As it stands today, there is not enough homes on the market to meet the demand that exists. As more inventory hits the market, hopefully the gap between supply and demand will narrow. This will slow down the acceleration of home values and keep homes more affordable.

No matter what happens in the housing market, rents will continue to increase, keeping home ownership as the more attractive and affordable option.

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If you are thinking about buying or selling, then visit my Pam Marshall Realtor website.

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