Housing Affordability

In today’s world of competitive markets, short inventory, and rising purchase prices, things are tough for home buyers (and believe it or not, sellers too!).  With steeply rising prices and bidding wars becoming the norm, it seems the market is unaffordable, and many people are having their hopes dashed by competition and a feeling that things are overpriced.  Looking at the data though, it appears that the overall market is not overpriced, and believe it or not, housing affordability seems to be in a good place.

This is, of course, based on a certain definition of housing affordability.  Homes have appreciated in many markets in the 10-12% range recently, and this is the reason many people find things “unaffordable”.  What is often overlooked, though, is that income and wage growth has climbed as well, with an average increase in the ballpark of 7% currently.

Well, if homes are increasing 10-12%, and wages are only increasing 7%, isn’t that a recipe for trouble?  Doesn’t that indicate that things are unaffordable or unsustainable?  At face value, it seems that way, but the reality is much different!

Let’s take a look at a scenario for a $500,000 mortgage, for a customer making $6500/month income.  We’ll assume, just for math’s sake, the mortgage is at a rate of 3.5%, and the buyer is using a 10% down payment.  Since our loan is $500,000, this makes the home purchase price $555,000. The mortgage payment in this scenario (principal + interest) would be $2245/month.

A home valued at $555,000 that appreciates 10% in a year would be worth $610,500.  Someone buying that home with 10% down would have a mortgage of $549,450, and at the same interest rate, the monthly payment is $2,467, or $222/month MORE than the same home the year before (again, assuming a 10% appreciation rate).

Now let’s look at income – that $222/month increase in mortgage payment is actually only 3% of the $6500/month earnings of our example borrower.  With wages increasing an average of 7%, the average earnings of a $6500/month employee would be expected to be $6955/month with wage growth of 7%, or $455/month more year over year.  And that $455/month more than covers the $222/month increase in mortgage money in this scenario.

Even with prices going up, in today’s market of increasing wage growth, things are still affordable.  In fact, today’s market represents the 7^th most affordable market in history, statistically speaking.

Even though housing affordability is still statistically reasonable, it does take some work to get an offer accepted, and there’s certainly a line where the price of a home is “too much”.  We offer our customers a glimpse at the local market using state of the art data tools that are specific to your local market, so if you have questions on how much you can qualify for, how much payments would be, or what the overall health of your local real estate market is, we can help!

Reach out today and we can help you determine your best path to home ownership!