Expensive Does Not Mean Unaffordable
"Affordable" is not the first word that comes to mind for anyone involved on the buying side of today's real estate market. While we realize that real estate is local and every market is somewhat different, the vast majorities of markets in the US today have one thing in common - prices that are going up, up, and more up. DOGE coin isn't the only thing that's been going "to the moon" the past year, as real estate prices have risen nationally in the 10-12% range.
With that in mind, would you believe we're in the midst of the 7th most favorable housing market for buyers in history when it comes to affordability?
This is because affordability involves much more than a price tag. And one data metric that has gone largely ignored until recent months is wage growth. For nearly a decade following the great recession, wage growth was stagnant, increasing by nominal margins while the prices on everything outside of housing remained fairly stable. In 2020, however, that changed. Wage growth, year over year, currently sits at a national average of a whopping 7%! While that's a huge gain, it is following years of stagnation, so there should be room for that trend to continue short term. And what does this have to do with the price of apples? I mean....housing?
Well, let's look at it this way - let's compare the median household income, currently sitting between $65,000 and $70,000/year - we'll use $68,000/year for our example, or $5,666/month. With a 7% wage growth, it's expected that year over year, that $5,666 will increase to $6,063, or an increase of about $400/month.
The median home price in the US sits just north of $300,000, and for our example, we'll use $325,000. Year over year, the price of that home, appreciating at 10%, will be $357,500 after 1 year. While $32,500 is a lot of money for most people, affordability is based on monthly payment, not the total dollar amount of appreciation. Stick with me.....
Let's look at things for an average borrower that's putting 10% down on their home. For the sake of simplicity, I'm using an example interest rate of 3.5% and not bringing PMI, taxes, or homeowners insurance into the equation.
On a $325,000 house with 10% down, a buyer ends up with a monthly payment of $1313/month.
On a $357,500 purchase and 10% down, the payment would increase to $1444/month, an increase of $131/month, or in terms of affordability, much less than the buyer's wage increases. And since most of the money due at closing is financed, the down payment increases by just about $5,000 over the course of a year.
It's this type of analysis that shows many prospective buyers out there on the fence about buying or "waiting for the dip" are going to be disappointed as home values continue to rise, markets continue to be competitive, and everything gets more expensive as builders struggle to keep up with demand. Yet another reason to buy now is that the real estate inventory issues aren't going to disappear overnight, but what could put a huge damper on affordability is the expected increase to interest rates - inflationary metrics have skyrocketed since Joe Biden took office (this is not political opinion, but fact), and that trend is expected to continue. With inflation comes increased mortgage rates, which could turn a competitive AND affordable market into a competitive, unaffordable market, which makes the best time to buy yesterday, but the next best time to buy today.
While the price tags on homes may not seem affordable, and bidding wars continue to drive up prices, based on the data and forecasts in terms of wage inflation and home appreciation, the market is still presenting a great opportunity for prospective buyers, so putting in the extra effort (and money) to get a home today should be worthwhile for people in most markets.
Curious how affordable your market is? Need advice on winning a bidding war and getting the house? We have local data for nearly every market in the US, and can help you get the home of your dreams! Give me a call at 484-680-4852 or if you have any mortgage or real estate related questions, you can ask an expert here!