The Affordability Window of Homeownership

For the last couple/three years, we have all given our clients the line about how affordable it is to buy a new home with low interest rates. Do we really understand what the “Affordability Window” is and are we prepared to explain to our clients that the window may be shrinking so it’s time to buy sooner than later?

First off – the “Affordability Window” is the gap between housing payment and income – not home prices and interest rates. Obviously, the larger the gap the more affordable homeownership can be for our clients.

This following graph (taken from some of my previous material; however, is still relevant to today’s numbers), shows the change in per capital income and the monthly payment for financing a median priced home at the prevailing 30-year fixed interest rate with a 20% down payment over the last 50 years or so. Notice that incomes doubled several times over, while monthly home payments did not. Homes became progressively more affordable despite rising home prices.  The Affordability Window is the area between the top of the Green and the top of the Blue (Variance between Monthly per Capital Income and Monthly Median Home Payment)

Interest rates allowed this relationship to play out. Rates spikes around 1980. As they fell over the next few decades, payments barely increased. When measured as a percentage of individual income, payments have only recently inched past a 50-year low.

Although, prices have been climbing, the pace of income levels in our area have also climbed steadily – both of these attributes combined with low interest rates still offers a great ‘affordability window’ to clients.

The key aspect to get across to our clients who are sitting on the fence to either buy or trade-up, is to point out to them that as mortgage interest rates continue to increase (and we know they will) the affordability window will start to shrink on them.

Sometimes taking a different approach with clients and showing them the strength and opportunity in real estate will help them realize the benefits of buying and investing in real estate.