Homes Are More Affordable Than They Seem
In today’s world of competitive markets, short inventory, and rising purchase prices, things are tough for home buyers (and sellers, too!). With sharp appreciation and bidding wars becoming more common, it seems the market is unaffordable, but when diving into the data, it appears that throughout the US, most markets are still very affordable based on wage growth and overall economic factors.
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 cannot be discounted though, is wage growth, which is averaging 7% year over year at the moment.
Homes appreciation 10-12%? Wages increasing 7%? Sounds unsustainable, right? Wrong! Taking a quick glimpse, it appears that things can’t continue this way, but wage growth was near stagnant for a decade, and recent increases leave a lot more room for home prices to continue to climb – great news for home buyers, better news for home owners, and bad news for those “waiting for the dip”.
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 price $555,000. The mortgage payment in this scenario (principal + interest) would be $2245/month.
Home prices at $555,000 and 10% appreciation would make the price after 1 year $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).
Let’s also take a look at the very important income figures – 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 home prices going up, in today’s market of increasing wage growth, homes are still affordable. In fact, today’s market represents the 7th 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!