Wednesday, March 9, 2022 / by Raj Jaggi
What Factors Affect Housing Affordability?
It's impossible to read a residential real estate article these days without the author highlighting the affordability issues that today's buyers face. Homes are unquestionably less inexpensive today than they were two years ago, but it does not mean they are suddenly unaffordable.
Housing affordability is determined by three factors: home prices, mortgage rates, and salaries. Let's take a closer look at each of these elements.
1. House Prices
Home values jumped 19.1 percent from last January to this January, according to CoreLogic's latest Home Price Insights study. One of the reasons for the drop in affordability over the past year was this.
2. Mortgage Rates
While the current global uncertainty makes forecasting mortgage rates difficult, we do know that current rates are about a full percentage point higher than last year. The average monthly rate in February was 2.81 percent, according to Freddie Mac. It was 3.76 percent in February. As a result of the rising mortgage rate, properties are becoming less affordable than they were last year.
3. Salary
An increase in American wages is the one large, positive factor in the affordability equation. Peter Miller addresses this issue in a recent essay for RealtyTrac:
“Prices are up, but what about wages? ADP reports that job holder incomes increased 5.9% last year but rose 8.0% for those who switched employers. In effect, some of the higher cost to buy a home has been offset by more cash income.”
In addition, the National Association of Realtors (NAR) recently released data on income and affordability. In each region of the country, the NAR data compares current median family income to the qualifying income for a median-priced home. Here's a visual representation of their findings:
In all four regions of the country, the median family income (shown in blue on the graph) is larger than the qualifying income required to purchase a median-priced home (shown in green on the graph). While those percentages may vary depending on where you live in each region, it's crucial to remember that homes are still cheap in the majority of the country.
When considering affordability, keep in mind that it encompasses more than just housing prices and mortgage rates. When prices and interest rates rise, affordability suffers, and analysts predict that both will rise in the months ahead. That's why buying a home is more expensive now than it was two years ago when prices and interest rates were lower. However, wages must also be considered while determining affordability. Wages have been rising, which is one of the reasons why, while homes are less cheap now, they are not unaffordable.
“Prices are up, but what about wages? ADP reports that job holder incomes increased 5.9% last year but rose 8.0% for those who switched employers. In effect, some of the higher cost to buy a home has been offset by more cash income.”
In addition, the National Association of Realtors (NAR) recently released data on income and affordability. In each region of the country, the NAR data compares current median family income to the qualifying income for a median-priced home. Here's a visual representation of their findings:
In all four regions of the country, the median family income (shown in blue on the graph) is larger than the qualifying income required to purchase a median-priced home (shown in green on the graph). While those percentages may vary depending on where you live in each region, it's crucial to remember that homes are still cheap in the majority of the country.
When considering affordability, keep in mind that it encompasses more than just housing prices and mortgage rates. When prices and interest rates rise, affordability suffers, and analysts predict that both will rise in the months ahead. That's why buying a home is more expensive now than it was two years ago when prices and interest rates were lower. However, wages must also be considered while determining affordability. Wages have been rising, which is one of the reasons why, while homes are less cheap now, they are not unaffordable.
Conclusion
Contact a reputable real estate professional to learn more about affordability in your region. They can help you figure out where home prices are in your area, what mortgage rates are doing, and connect you with a lender so you can make an educated financial decision. Remember that while homes are less inexpensive, they are not unaffordable, so you may still buy now.
