Housing Wealth: The Missing Piece of the Affordability Equation

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Real Estate Agent with Luxury Valley Homes Scottsdale SA524104000

Housing Wealth: The Missing Piece of the Affordability Equation

Housing Wealth: The Missing Piece of the Affordability Equation | LVH

The real estate market is soaring today. Residential home values are rising, and that’s a big win for homeowners. In 2020, there was a double-digit increase in home values – a trend that’s expected to head toward similar levels this year.

However, skyrocketing prices are causing some to start questioning affordability in the current housing market. Many are quick to emphasize the fact that homes today are less affordable than they were last year. Black Knight, a leading provider of data and analytics across the homeownership life cycle, just reported on the issue.

The findings show the historical averages of the national payment to income ratio, which they define as “the share of the median income needed to make the monthly payments on the median-priced home.” Their study reveals:

  • The average over the last 25 years was 23.6%
  • The average over the last 5 years was 20.1%
  • The average today stands at 20.5%

Right now, housing payments are slightly less affordable than the five-year average – but only by less than ½ a percentage point. However, they’re significantly more affordable than the 25-year average. Put another way, a buyer will likely make a slightly greater financial sacrifice to afford a home right now than if they purchased a home within the last five years. On the other hand, it also means the potential financial sacrifice is not nearly as great as it was over the last 25 years.

Does making a sacrifice to buy a home today make financial sense in the long term?

Last week, the Federal Reserve announced that, in the first three months of the year, household net worth increased by $968 billion based solely on the values of the real estate they owned. Another report from CoreLogic reveals the average annual gain in homeowner equity was $33,400 per borrower.

Homeownership continues to be the cornerstone to building personal wealth. For most Americans, their home is the largest asset they own. On top of that, the difference between the net worth of homeowners and renters is significant at every income level. Here’s a table detailing that point using data from a study done by First American:Housing Wealth: The Missing Piece of the Affordability Equation | MyKCMOwning a home is an essential steppingstone to grow a household’s net worth. Despite the slightly greater sacrifice in the percentage of monthly income, you’ll spend on housing today, for most homebuyers, the payoff of starting to build equity now will be worth it.

Bottom Line

Since prices have risen dramatically over the past 18 months, it’s slightly less affordable to buy a home today than it was a year ago. However, when you consider the equity gain and weigh the long-term benefits of building your net worth, you may question if you can afford not to buy now.

Comments (1)

Philip A. Raices
Turn Key Real Estate - Great Neck, NY
1 of the Most Knowledgeable Brokers on the Net!

Jane & Jeff,  

Superior article about why one should pull the trigger.  However, the problem I see over the last year or 2 is that there are those that can't seem to come up with the necessary downpayment as well as the bidding wars that have been going on.  I agree ownership is critically and crucially important to our economy and one's long term wealth. My agents and I even consult and advise our clients to tap into their retirement plans without penalty to be able to come up with the necessary downpayment to purchase.  Unfortunately, cash buyers in a majority of instances are causing havoc in the market and knocking out extremely well qualified purchasers, that is one of the biggest problems besides the sheer lack of inventory nationwide.  However, when you read the other side of the story many are pushing the "bubble" in real estate prices without talking about the severe lack of housing and as long as the demand continues and interest rates stay <4% I think with the millions of capable buyers entering the market every year, builders who cannot satisfy that huge demand, then our market should still be an excellent one to be part of.  The one unknown in our crystal ball is world events and things that might happen that would change the selling and buying environment.  Enjoy your weekend! 

Jun 17, 2021 09:19 AM