Expensive Does Not Mean Unaffordable

By
Mortgage and Lending with Mason-McDuffie Mortgage, Conventional Loans, Jumbo Loans, FHA, 203(k), USDA, VA, NMLS #138061 MMCD #1141

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!

Comments (27)

Margaret Rome Baltimore 410-530-2400
HomeRome Realty 410-530-2400 - Pikesville, MD
Sell Your Home With Margaret Rome

Well deserved featured post

John Meussner, My favorite line '' ...the best time to buy yesterday, but the next best time to buy today.''

May 05, 2021 07:57 PM
John Meussner

Thank you Margaret!  Well, maybe not yesterday (ideally, 2013), but today is the best time for anyone still looking!

May 06, 2021 10:47 AM
Michael Jacobs
Pasadena, CA
Los Angeles Pasadena 818.516.4393

Hello John - the conversation of affordable real estate is one that becomes more relevant in the future.    Is it a case of woulda - coulda - shoulda or one where gratefulness is experienced because the decision to purchase was made?  

May 06, 2021 04:40 AM
John Meussner

I've heard no one regret the immense wealth they've built over the past couple years of appreciation : )   It's life changing for many people, and the only reason to get it is to buy

May 06, 2021 10:48 AM
Nina Hollander, Broker
Coldwell Banker Realty - Charlotte, NC
Your Greater Charlotte Realtor

Hi John... that's a really good point of distinction... I'm always telling clients to consider what they can afford and not just look at the price tag. They are often surprised by what they find affordable.

May 06, 2021 04:52 AM
John Meussner

Yep, the monthly payment and budgeting deserves more focus.   If a home costs a trillion dollars, does it really matter if your payment is $1/month? : )

May 06, 2021 10:49 AM
Paula McDonald, Ph.D.
Beam & Branch Realty - Granbury, TX
Granbury, TX 936-203-0279

Well thought out post on this topic. Nicely done - thank you.

May 06, 2021 05:27 AM
John Meussner

Thanks Paula, I appreciate that!

May 06, 2021 10:49 AM
Dorie Dillard Austin TX
Coldwell Banker Realty ~ 512.750.6899 - Austin, TX
NW Austin ~ Canyon Creek and Spicewood/Balcones

Good morning John Meussner ,

There you go thinking outside the box with your lender knowledge and have provide us with another set of talking points to buyers! Thank you for a well thought out post ..so glad to see it featured!

May 06, 2021 05:52 AM
John Meussner

Thank you Dorie, that was my goal - the more we educate buyers, the more they'll realize the opportunity in front of them, too many people have been trained to focus on the wrong things

May 06, 2021 10:49 AM
Mark Don McInnes, Sandpoint
Sandpoint Realty LLC - Sandpoint, ID
North Idaho Real Estate - 208-255.6227

Good job John,  Clearly stated.  Monthly cost not the home price is what it all boils down to.  Mark

May 06, 2021 09:05 AM
John Meussner

Exactly!  Thanks for stopping by Mark!

May 06, 2021 10:50 AM
Debb Janes EcoBroker and Bernie Stea JD
ViewHomes of Clark County - Nature As Neighbors - Camas, WA
REALTORS® in Clark County, WA

Really a smart post. Thanks John. 

May 06, 2021 09:37 AM
John Meussner

Thank you Debb, appreciate it : )

May 06, 2021 10:50 AM
Shannon Jones
The Shannon Jones Team - Long Beach, CA
Long Beach CA Real Estate

Great explanation, but I will say, here in Long Beach our median home price has now gone above $800,000. Some zip codes are even higher, so we certainly are seeing many buyers get priced out of the market - and quickly!

May 06, 2021 11:16 AM
John Meussner

Yep, I have lots of friends & family down there.  It's tough, but worth it if people can pull money together from anywhere

May 10, 2021 09:25 PM
Bruce Hicks
Best Homes Hawaii - Honolulu, HI
Your Best Hawaii Realtor!

Median SF home $985,000 with 9 days on the market.  A wild season going on here.🙂

May 06, 2021 09:17 PM
John Meussner

yes it is!  I expect it to keep up at least short term!

May 10, 2021 09:27 PM
Paddy Deighan MBA JD PhD
federalfinanciallawgroup.com - Vail, CO
Paddy Deighan J.D. Ph.D

good points and ones that are often overlooked....we all need to keep this in mind shen advising clients or looking for ourselves!!!!

May 07, 2021 12:46 AM
Kimo Jarrett
WikiWiki Realty - Huntington Beach, CA
Pro Lifestyle Solutions

The FED is printing money almost 3 trillion dollars in two years, the new congress is tapping almost 6 trillion for spending, the dollar is forecast to crash, the inflation factor is rising and wages had been increasing until the pandemic arose yet, I am optimistic that business will still prevail depending on your target market.

We'll have about 40 trillion dollars in national debt by 2022 and I'm hopeful that our economy will not slide into a recession after the winter holidays and you say?

May 07, 2021 01:51 AM
John Meussner

Hi Kimo Jarrett - great insight - I actually anticipate a recession next year, but also expect home values to continue to climb and the recession bringing us lower rates (again).  Until supply can balance out the growing home buyer demographics, I think home values and appreciation are safe - BUT, I expect the stock market to take a hit, crypto to run into headwinds, and we'll need appreciation to at least slow down to remain at healthy levels in line with wage growth.  2022 should be an interesting year (as if we haven't had enough 'interesting' recently)

May 10, 2021 09:35 PM
Sham Reddy CRS
H E R Realty, Dayton, OH - Dayton, OH
CRS

Thanks for sharing John!

"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. 

May 07, 2021 04:17 AM
Scott Seaton Jr. Bourbonnais Kankakee IL Home Inspector
SLS Home Inspections-Bradley Bourbonnais Kankakee Manteno - Bourbonnais, IL
The Home Inspector With a Heart!

this is why AR is so valuable to people on the outside like me trying to explain to people why it's a good time to buy a home.

May 07, 2021 05:23 AM
John Meussner

Appreciate that Scott, thank you : )

May 10, 2021 09:36 PM
Carla Freund
Keller Williams Preferred Realty - Raleigh, NC
Carolina Life RealEstate & Relocation 919-602-8489

Great explanation! People sometimes forget this is an investment. People who purchased in February or March have already increased their investment.

May 07, 2021 06:06 AM
John Meussner

Yep, even a primary residence  needs to have that taken into consideration - appreciation and amortization are incredibly powerful when it comes to building wealth.

May 10, 2021 09:36 PM
Mary Hutchison, SRES, ABR
Better Homes and Gardens Real Estate-Kansas City Homes - Kansas City, MO
Experienced Agent in Kansas City Metro area

Home ownership is a way to build wealth, and with so many buyers going way way over asking price--they better plan on staying in the house a long time to realize any real gains.  

May 08, 2021 11:54 AM
John Meussner

Yes and no - depends on the market.  I'm a good example - I bought a year ago, and am looking to upsize, partially using funds from just 1 year of owning.

May 10, 2021 09:37 PM
Beth Atalay
Cam Realty and Property Management - Clermont, FL
Cam Realty of Clermont FL

Hi John Meussner, I'm currently with a buyer who recently moved to FL, when I first spoke to him, his budget was no higher than $350,000. After speaking with a lender and getting a feel of the market, his price tag went up to $500,000.  This is a great post, thank you for sharing!


May 11, 2021 10:32 AM
John Meussner

Thanks Beth, appreciate it!

May 13, 2021 06:14 PM
Gwen Banta
Sotheby's International Realty - Los Angeles, CA

"...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."  - great summary, which I will use when speaking to clients. Thank you.

May 11, 2021 02:56 PM
John Meussner

Glad it could help, thanks Gwen!

May 13, 2021 06:14 PM
Sham Reddy CRS
H E R Realty, Dayton, OH - Dayton, OH
CRS

That's the truth, thanks for shaing John!

Affordability involves much more than a price tag.  And one data metric that has gone largely ignored until recent months is wage growth. 

May 12, 2021 04:48 AM
John Meussner

Thanks Sham!

May 13, 2021 06:14 PM
Greg Mona
eXp Realty - Scottsdale, AZ
Professional Real Estate Representation for YOU!

Well done, John Meussner! I've been preaching similar things to my current (and recently closed!) buyer clients, but I admit my "speech" is not as good as your post was! If you don't mind, I'll use some of your verbiage in the future.  Thanks for posting this valuable information!

May 12, 2021 04:15 PM
John Meussner

Go for it, Greg!  Our team is licensed in AZ, so if you'd like some backup we're always happy to help and talk with them and walk them through our data tools as well : )  Appreciate the comment!

May 13, 2021 06:15 PM
Dorte Engel
RE/MAX Leading Edge - Bowie, MD
ABC - Annapolis, Bowie, Crofton & rest of Maryland

Dear John,

You might get gray hair and a long beard waiting for "the dip." It is better to ask how something is possible, not if it is possible. Many times, you just need to get a little creative to make things work out well.

May 20, 2021 08:35 PM