Are Homes Still Affordable?

What does your income need to look like if you aspire to become a homeowner in the future? Today I’ll talk about home affordability as it applies to the market today.
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Rising home prices have many concerned that the average family will no longer be able to afford the most precious piece of the American dream: their own home. However, it’s not just the price of a home that determines its affordability.

The monthly cost of a home is determined by the price, the interest rate, and the mortgage used to purchase it. Today mortgage interest rates stand at about 4.5%. The average annual mortgage interest rate from 1985 to the year 2000 was almost double that number, at 8.9%.

When looking at the affordability today versus other periods of history, we must also realize that incomes have increased over time. This is why most indices use the percentage of median income required to make monthly mortgage payments on a home as the point of comparison. In other words, how much of their income a typical family is spending for their housing costs.

Zillow recently released a report comparing home affordability over the decades using the chart displayed on the video above at 1:45. Looking at the chart, you can see that even though homes are less affordable this year than last year, they are far more affordable today (at 17.1% of one’s household income) than they were between 1985 and 2000 (which ranged up to 21% of one’s household income).

Also, don’t miss the fact that homes are much more affordable now than they were at the peak of the housing bubble in 2006, when a family would spend 25.4% of their income on their home.
“
Homes are much more affordable now than
they were at the peak of the housing bubble.”
You may wonder what will happen when mortgage rates rise. Most experts think that the mortgage interest rates will increase to about 5% by the year’s end. How will that impact affordability?

Zillow also covered this in their report. As you can see on the chart displayed on the video above at 2:40, rates would need to approach 6% before homes became less affordable than they had been historically.

What does all of that mean to you?

Though homes are less affordable today than they were last year, they’re still a great purchase while interest rates are below the 6% mark.

If you have any questions about home affordability, reach out to us. We can talk about you can take advantage of this very favorable situation. We’re also here to assist you every step of the way towards making your real estate dreams a reality.