The Affordability Index Has Shifted - Does It Matter?

Real Estate Agent with Keller Williams Capital Properties DC AB15253

Everyone knows that the real estate market is soaring today. Residential home values are rising, and that’s a big win for homeowners who were lucky enough to already have purchased. In 2020, there was a double-digit increase in home values – a trend that’s expected to head toward similar levels this year.  Pity the poor buyers though who are still trying to find their dream homes!  They are faced with the question of whether they should keep trying to buy - or just renew their leases for another year and wait it out.  Will prices go down next year? Will interest rates go lower? There is no definite answer for any of those questions although trends (and Fed prognostications) do give a hint. 

Skyrocketing prices are causing not just current buyers to start questioning affordability in the current housing market. Many pundits are quick to emphasize the fact that homes today are less affordable than they were last year - but what does that really mean? 

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.

Home ownership 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:Owning 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, the Fed is projecting that interest rates will increase over the next year, which will further increase the cost of buying a home.  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 (9)

Michael Jacobs
Pasadena, CA
Los Angeles Pasadena 818.516.4393

Hello Lise - it is nice to "see" you on the pages of ActiveRain and the home affordability factor is a common discussion in our area as it is in the Washington DC area and now even moreso in many parts of the country.  

Jun 18, 2021 07:29 AM
Will Hamm
Hamm Homes - Aurora, CO
"Where There's a Will, There's a Way!"

Hello Lisa and thanks for the great information to share with us here in the Rain.  Make it a great day!


Jun 18, 2021 08:15 AM
Joan Cox
House to Home, Inc. - Denver Real Estate - 720-231-6373 - Denver, CO
Denver Real Estate - Selling One Home at a Time

Lise, nice to see you again, you have been missed.    I do believe affordability has left the building! 

Jun 18, 2021 08:16 AM
Nina Hollander, Broker
Coldwell Banker Realty - Charlotte, NC
Your Greater Charlotte Realtor

HI Lise... no doubt affordability is impacted as home prices rise. I suspect that the worst hit will be the first time buyers who are usually the most sensitive.

Jun 18, 2021 08:38 AM
George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert

Lise when I look into my crystal ball I do not see prices or interest rates going down in another year.  In fact if I were a betting man I think the opposite is more likely.

Jun 18, 2021 12:44 PM
James Dray
Fathom Realty - Bentonville, AR
Exceptional Agents, Outstanding Results

Morning Lise.

If you don't mind I'm going to use this at our next meeting.  

Jun 19, 2021 12:23 AM
Brian England
Arizona Focus Realty - Gilbert, AZ
MBA, GRI, REALTOR® Real Estate in East Valley AZ

Those are some powerful statistics and I am glad that I bought my house a long time ago since I don't think I could afford anything in this market, haha.

Jun 19, 2021 06:09 AM
Roy Kelley
Retired - Gaithersburg, MD

Now is the time we wish we had found another home. We would love to take advantage of this market to sell our home.

Jun 19, 2021 12:16 PM
Dr,Benjamin Owen
Autaugaville, AL


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