With Home Values Surging, Is it Still Affordable to Buy Right Now?

Inventory is at an all-time low. According to Realtor.com there are 39% fewer homes for sale today than last year. Buyer demand remains strong and as a result there is a shortage of homes available.

Research analyst Ivy Zelman explains:

“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 demandparticularly for this time of year, remains apparent.”

It is simple supply and demand. When there is high demand and low supply the prices consequently increase. The real estate market is showing this at the present time. Home prices a surging at a rapid rate.

If you are looking to sell your home then it is great news for you. However, if you are a first-time buyer or looking to upgrade your home, it may be troubling news. It is important for buyers to note that the sales price of the home is not as important as the monthly cost.

There are 2 major factors that influence the cost of the home:

  1. Sales price of the home
  2. Mortgage interest rate that the buyer can borrower money

How do these factors impact affordability?

The National Association of Realtors (NAR) produces a Housing Affordability Index which takes these factors into account and determines an overall affordability score for housing. According to NAR, 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.”

Their methodology states:

“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.”

With Home Values Surging, Is it Still Affordable to Buy Right Now? | MyKCM

The higher the index, the more affordable it is to purchase a home.

The graph above shows the index going back to 1990. The blue bar represents today’s affordability.

We can see that homes are more affordable now than they were from:

  • 1990 to 2008
  • 2017 to 2018

Buying a home today is just a little less affordable than it was last year, but still very affordable compared to historical housing market trends.

Note: During the housing crash from 2009 to 2015, distressed properties (foreclosures and short sales) dominated the market. Those properties were sold at large discounts not seen before in the housing market.

Why are homes still affordable today?

The number one factor affecting the affordability of home is the record-low mortgage interest rates. The prices will continue to rise. Despite this, mortgage rates have fallen to such a low rate that it counters the affect of high sales prices. Freddie Mac announced that the average rate on a 30-year fixed mortgage is 2.72%. Last year during this time the average was 3.68%

It is important to understand these factors when planning to buy a home. Don’t look only at the sales price. Low mortgage rates allow you to afford higher priced homes and save a lot of money over the life of the loan.

Bottom Line

Home affordability is at a good place today. We do however need to keep an eye on the home price increases in the future. As Mark Fleming, Chief Economist at First American, noted in a recent post:

“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 are looking to get a mortgage pre-approval call Iliana Tegov Mortgage Broker with Voget Financial Services at 954-614-9000. The experts at Prestige Waterfront Realty will help find you your dream home. Call PWR at 954-830-7000.

Leave a Reply

Your email address will not be published. Required fields are marked *