Home prices are at all time highs! It’s a bubble! There’s a dip coming! It’s a terrible time to buy! These are some of the things headlines have been touting for….well, years now, as appreciation in the housing market has marched higher. And yes, home prices are up – much higher in some markets, than a few years back. If we look back even 5-6 years ago media pundits were sounding alarms on housing as if prices were doomed to drop at any moment. Those who have listened to those pundits have missed out on opportunities to accumulate a tremendous amount of wealth through housing. So with home prices moving so much so fast, the question remains – is housing still affordable?
Most consider this question by looking at one thing – price tags. Homes were $300,000 just a couple years ago and now they’re $400,000. In some markets, a nice home can’t be found for under a 7-figure price tag. What gives? OF COURSE, that’s unaffordable. Right ? If we look deeper into the data, economics, and look at what has happened in the broader picture since the last (very real) bubble we experienced (the “Great Recession”), things aren’t as they seem. In fact, the current market, high price tags and all, is a very affordable one. But how!?
One of the first things we need to look at is home prices vs average wages, because after all, “can you afford it” includes 2 pieces – how much does it cost? AND, how much do you have available to pay? On the surface, things still tend to point to things being unaffordable. Average wages since 2006 have come up 55%. Home prices have, on average, come up 41% during the same period. But in 2006, it’s important to remember average interest rates were north of 6% for conventional 30 year fixed rate mortgages. Today, rates are about half of that.
Why do rates matter? Because they directly influence payment, and the payment, not the entire price tag, is what you can “afford”. If I offer you $1 billion dollars on a loan you repay at $1/month, I think we can agree that a billion dollars is ‘affordable’. If I offer you $1 billion with a repayment of $100 million/month, not many people would think of that as affordable.
So let’s look at an example. In 2006, we’ll take a home worth $300,000.
Monthly Payment: $1,800
Household income: $6,000/month
% of monthly income that goes to the mortgage payment: 30%
Now let’s look at that same home in 2021
Price: $423,000 (up 41%)
Monthly payment: $1,783
Household income: $9,300 (up on average 55% since 2006)
% of monthly income that goes to the mortgage payment: 19%
These are the averages nationwide, and of course numbers will be different for every person, situation, and things vary by region, but on average, the market is about 11% more affordable today than it was in 2006.
Further, housing still has room to go – with supply lagging far behind demand and a generation of first time buyers coming of age, nearly all forecasts point to further home appreciation. Add in supply-chain issues, inflation, and many other metrics and signs point to affordable housing being a very realistic thing. That means today is a great time to buy, despite steep competition and high price tags. To see what options you have in your area, you can contact your MasonMac loan officer, or contact us with questions by asking an expert here!