can i afford a house

Home values are climbing — but it’s still a great time to buy

Bethany RamosFirst-Time Homebuyer, Home Buying, Industry Professionals, Mortgage Rates, News, Selling

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Housing inventory just reached an all-time low. Today, 39 percent fewer homes are listed for sale compared to last year, has confirmed.* And yet, buyer demand stays high.

Ivy Zelman, research analyst, provides an explanation in a recently published newsletter:

“Although the headwind of severe supply constraints in most markets has contributed to slight moderation in seasonally-adjusted and year-over-year new pending contract growth for two consecutive months (albeit still growing strongly), the underlying strength of buyer demand, particularly for this time of year, remains apparent.”

The price of an item will surge when it’s in demand and when there’s a shortage of supply. This is what’s currently taking place* in the real estate market. Because of this, home values are on the rise.

While this is good news if you hope to sell or refinance your house right now, it may sound discouraging to a first-time or repeat homebuyer. But it’s helpful for today’s buyers to understand: A home’s price doesn’t matter as much as its monthly cost of ownership. Let’s dive into this deeper.

‘Can I afford a house?’ 2 determining factors

While several components can influence a home’s cost, these are two of the biggest:

  1. The home’s price.
  2. The mortgage rate at which a homebuyer borrows.

The Housing Affordability Index is produced by the National Association of REALTORS® (NAR). The index accounts for these factors to calculate an overall affordability score for purchasing a house.

The NAR states that the index:

“…measures whether or not a typical family earns enough income to qualify for a mortgage loan on a typical home at the national and regional levels based on the most recent price and income data.”

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The NAR’s methodology shows that:

“To interpret the indices, a value of 100 means that a family with the median income has exactly enough income to qualify for a mortgage on a median-priced home. An index above 100 signifies that family earning the median income has more than enough income to qualify for a mortgage loan on a median-priced home, assuming a 20 percent down payment.”

Essentially, the higher the index climbs, the more affordable it is to become a homeowner. This is depicted in the graph below, dating back to 1990:

can i afford a house

Today’s affordability is seen in the blue bar above. This confirms that, right now, houses are more affordable than they were in:

  • 1990-2008
  • 2017-2018

Buying a house today is slightly less affordable than it was a year ago. But it’s still highly affordable compared to historical trends seen in the housing market.

*Note: Distressed properties, including short sales and foreclosures, dominated the housing market in the crash experienced from 2009 to 2015. Those properties sold at significant, never-before-seen discounts.

Why are houses this affordable today? Record-low mortgage rates are the number one defining factor. It’s true that home prices are rising. At the same time, mortgage rates have plummeted dramatically. The latest average 30-year fixed interest rate was reported by Freddie Mac at 2.66 percent. At this time last year, that average rate sat at 3.73 percent.

Home affordability is still considered historically great. But homebuyers may be better off acting sooner, before the next home value increase.

As Mark Fleming, First American Chief Economist, says:

“Faster nominal house price appreciation can erode, or even eliminate, the boost in affordability from lower mortgage rates, especially if household income growth doesn’t keep up.”

If you’re thinking about buying your first house or selling and moving up to your dream home, understanding how affordability relates to your home’s overall cost is critical. Buying when mortgage rates are at historic lows, as they currently are, may reduce your monthly payment and ultimately save you extra money over the life of your mortgage.

Make the house-hunt easy

Prequalify for a mortgage right now. That’s really all it takes to stand out among multiple offers and show a seller you’re serious. And, when you prequalify before house-hunting, you’ll find out how much house you can afford at today’s low rate so you don’t waste time shopping in the wrong price range.

For educational purposes only. Please contact a qualified professional for specific guidance.

Sources are deemed reliable but not guaranteed.

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