WITH HOUSING PRICES AND MORTGAGE RATES CONTINUING TO RISE, HOW CAN I AFFORD TO BUY A HOME NOW?

In my previous article WHAT’S KEEPING HOUSING PRICES HIGH?  I discussed the effects of Supply and Demand on today’s housing Market.  You can read that article here.   Today, in this article, I would like to touch on affordability.  

According to Freddie Mac’s chief economist “Mortgage rates are now at their highest level since the week of August 22, 2013, the highest level in almost five years. Higher treasury yields driven by rising commodity prices, more treasury issuances and the steady stream of solid economic news are behind the uptick in rates.”  What that means is this.  For people who own a home now and are thinking about moving up, if they want to move up to a bigger house or a house that fits their needs better in a nicer neighborhood they’re going to pay a little extra money for their house.  If they are a homeowner now with a three, three and a half percent mortgage, they’re going to pay extra money for that new house.  That new mortgage payment is going to be dramatically higher. 

For this reason, we have many homeowners who are “Locked-in” to their current home.  They’re saying, “I can’t sell this house because my mortgage rate is so good.”   These homeowners are going to remodel, add-on and otherwise make-do with the home they’re in now.  This is the reason why we have supply shortage in the market today. Which in turn is driving up housing prices.

However, a homeowner who is Locked-in and thinking that they want to wait for rates to get better or for housing prices to come down, they should read my previous article here.  It’s important that they understand what’s driving the market and that they should consider moving while interest rates are still historically low. When interest rates return to normal levels at six, six and half percent, that’s going to result in an even bigger difference in their mortgage payment. 

The chart below shows NAR’s housing affordability index. Anything over 100 is considered a balanced market or affordable.  The higher the bar, the easier it was to afford a home. If you take a look from 2006 to 2017, during the bust and the recovery, the housing affordability index was way up.  We were clearing out a whole bunch of distressed properties, short sales and foreclosures that would be selling on maybe 50 cents on a dollar or 80 cents on a dollar. Of course, affordability was better then. Houses were less money then and interest rates were still low, but if we go past that light blue line and take a look at where they were from 1985 all the way up to 2004 where the affordability was and remember, the higher the bar the more affordable it was. We can see that where we stand today houses are more affordable today than they were between 1985 and 1989, 1990 to 1994, 1995 to 1999 and 2000 to 2004 and also 2005 to 2007. 

Nar.realtor

Let’s take a look at NAR affordability index by region.  A hundred means a balanced market. The West is lower than the rest of the of the country, but they’re still above 100.   So, they’re in a very healthy market.   Of course, when we get into certain pockets, you're going to find places that are going to be under 100, but overall as a country, affordability is still in really good shape. That’s because, even though rates are going up and prices are going up, so are incomes. 

http://economistsoutlook.blogs.realtor.org/2018/04/25/february-2018-housing-affordability-index/

Here’s another study by NAR. In the last year, in the United States and in each one of the regions of the country, we can see that incomes have gone up. They’ve gone up quite nicely actually and that plays into your affordability. Obviously, if you’re making more money, you can afford more of a house. 

http://economistsoutlook.blogs.realtor.org/2018/04/25/february-2018-housing-affordability-index/

Zelman and Associates have a new metric, the entry-level affordability index for first-time homebuyers. Are houses more affordable or less affordable? They went all the way back to 1990 to 1999 and again, their metric is 100. However, they have it in reverse. Anything under 100 is favorable. Anything over 100 in their metrics, means that people are being stretched.   We can see that not only are we below 100, but outside of the bust where everything was sold and discounted, we’re better now than we were between 1990 to 1999 and from 2000 to 2003 and from 2004 to 2007.

https://www.zelmanassociates.com/member-portal/z-report-member-site/the-most-important-residential-construction-metric (subscription required)

The Urban Land Institute just did a study about the affordability index by state with a 20 percent down payment. Historically, you wanted to have less than 21 percent of your income after expenses going to your mortgage payment. That’s the historic number and we can see that the dark blue is the vast majority of the states. New Jersey is at 19.4.  In the light blue states many people are stretching it right now. They’re going a little bit above the historical norm.  So, if we take a look at the 21 to 24 percent of their income going toward their mortgage payment, we can see now that almost every state in the country is blue of one shade or the other.   The only three places that really stretching it is Oregon, up above 25 percent and California and Hawaii are up over 30 percent.   In those states, it’s a little less affordable, no question, but with a 20 percent down payment outside of those three states, we’re fine. 

https://www.urban.org/policy-centers/housing-finance-policy-center/projects/access-and-affordability-interactive-map-and-research-3-barriers-homeownership

If we drop down to a three and a half percent down payment, that impacts the map dramatically.  If someone is only putting down3.5 percent, then their monthly mortgage payment is going to be higher. But even here, if we just take a look at all the states that are blue, the vast majority are at normal numbers or are stretching just a little bit.  Out west, where prices definitely have appreciated, they’d have to stretch even more and then California and Oregon and Hawaii, they’re all red now.  To make it affordable, they’re going to have to come with more money down.  With the higher prices there, that’s going to be even more difficult for them to do. 

https://www.urban.org/policy-centers/housing-finance-policy-center/projects/access-and-affordability-interactive-map-and-research-3-barriers-homeownership

In conclusion, with housing prices and mortgage rates continuing to rise, if you need to move you can’t afford to put off buying a home.  Luckily, Interest rates are still at an all-time low.  If you have a house to sell, and it’s in decent condition, due to the inventory shortage, you will likely get a great price for the home you have now.   Depending on how much you are able to put as a down payment on the house, your mortgage payment should still be affordable.  The larger the down payment you put on your new home the more affordable your mortgage payment will be. 

If you’re considering buying or selling a home.  Don’t wait.  Contact me today and let’s set aside a date to have a discussion about your housing situation.   You can email me at [email protected]