What Affects Home Affordability? Navigating the Shift in Housing Affordability
Over the past year, a lot of people have been talking about housing affordability and how tight it’s gotten. But just recently, there’s been a little bit of relief on that front. Mortgage rates have gone down since their most recent peak in October. But there’s more to being able to afford a home than just mortgage rates.
What Affects Home Affordability? Transitioning into a New Landscape: Mortgage Rates Take a Dip
Mortgage rates have come down in recent months, marking a significant shift in the real estate landscape. And looking forward, most experts expect them to decline further over the course of the year. Jiayi Xu, an economist at Realtor.com, emphasizes the positive trajectory, stating: “While there could be some fluctuations in the path forward … the general expectation is that mortgage rates will continue to trend downward, as long as the economy continues to see progress on inflation.”
This reduction in mortgage rates isn’t just a number on paper. Even a small change in mortgage rates can have a big impact on your purchasing power, making it easier for you to afford the home you want by reducing your monthly mortgage payment.
What Affects Home Affordability? The Interplay of Key Factors: Mortgage Rates, Home Prices, and Wages
To really understand home affordability, you need to look at the combination of three important factors: mortgage rates, home prices, and wages. Let’s dive into the latest data on each one to see why affordability is improving.
What Affects Home Affordability? Analyzing the Trifecta: Understanding the Key Component
1. What Affects Home Affordability? Mortgage Rates
This is the factor most people are focused on when they talk about homebuying conditions today. So far, current rates are almost four full percentage points higher than they were at the beginning of the year. Len Kiefer, Deputy Chief Economist at Freddie Mac, explains the stark reality: “U.S. 30-year fixed mortgage rates have increased 3.83 percentage points since the end of last year. That’s the biggest year-to-date increase in rates in over 50 years.”
The increase in mortgage rates is impacting how much it costs to finance a home purchase, creating a challenge for many buyers that’s pricing some out of the market. While the current global uncertainty makes it difficult to project where mortgage rates will go in the future, experts do say that rates will likely remain high as long as inflation does.
2. What Affects Home Affordability? Home Prices
The second important factor is home prices. After going up at a relatively normal pace last year, they’re expected to continue rising moderately in 2024. That’s because even with inventory projected to grow slightly this year, there still aren’t enough homes for sale for all the people who want to buy them. According to Lisa Sturtevant, Chief Economist at Bright MLS: “More inventory will be generally offset by more buyers in the market. As a result, it is expected that, overall, the median home price in the U.S. will grow modestly.”
That’s great news for you because it means prices aren’t likely to skyrocket like they did during the pandemic. But it also means it’ll probably cost you more to wait. So, if you’re ready, willing, and able to buy, and you can find the right home, purchasing before more buyers enter the market and prices rise further might be in your best interest.
3. What Affects Home Affordability? Wages
Another positive factor in affordability right now is rising income. The graph below uses data from the Federal Reserve to show how wages have grown over time:
If you look at the blue dotted trendline, you can see the rate at which wages typically rise. But on the right side of the graph, wages are above the trend line today, meaning they’re going up at a higher rate than normal.
Higher wages improve affordability because they reduce the percentage of your income it takes to pay your mortgage. That’s because you don’t have to put as much of your paycheck toward your monthly housing cost.
What Affects Home Affordability? Decoding Affordability: A Holistic Perspective
Every time there’s a news segment about the housing market, we hear about the affordability challenges buyers are facing today. Those headlines are focused on how much mortgage rates have climbed this year. And while it’s true rates have risen dramatically, it’s important to remember they aren’t the only factor in the affordability equation.
What Affects Home Affordability? The Comprehensive View: Three Measures of Home Affordability
Here are three measures used to establish home affordability: home prices, mortgage rates, and wages. Let’s look closely at each one.
1. Mortgage Rates
This is the factor most people are focused on when they talk about homebuying conditions today. So far, current rates are almost four full percentage points higher than they were at the beginning of the year. As Len Kiefer, Deputy Chief Economist at Freddie Mac, explains: “U.S. 30-year fixed mortgage rates have increased 3.83 percentage points since the end of last year. That’s the biggest year-to-date increase in rates in over 50 years.”
That increase in mortgage rates is impacting how much it costs to finance a home purchase, creating a challenge for many buyers that’s pricing some out of the market. While the current global uncertainty makes it difficult to project where mortgage rates will go in the future, experts do say that rates will likely remain high as long as inflation does.
2. Home Prices
The second factor at play is home prices. Home prices have made headlines over the past few years because they skyrocketed during the pandemic. As the Bureau of Labor Statistics (BLS) reports: “Median weekly earnings of the nation’s 120.2 million full-time wage and salary workers were $1,070 in the third quarter of 2022 (not seasonally adjusted), the U.S. Bureau of Labor Statistics reported…This was 6.9 percent higher than a year earlier.”
So, when you think about affordability, remember the full picture includes more than just mortgage rates. Home prices and wages need to be factored in as well. Because wages have been rising, they’re a big reason why serious buyers are still purchasing homes this year.
What Affects Home Affordability? Charting Your Path: What This Means for You
Higher wages improve affordability because they reduce the percentage of your income it takes to pay your mortgage. That’s because you don’t have to put as much of your paycheck toward your monthly housing cost.
What Affects Home Affordability? The Road Ahead: Implications for Homebuyers
Home affordability depends on three things: mortgage rates, home prices, and wages. The good news is, they’re moving in a positive direction for buyers overall.
What Affects Home Affordability? The Bottom Line: A Green Light for Potential Buyers
If you’re thinking about buying a home, it’s important to know the main factors impacting affordability are improving. To get the latest updates on each, connect with a trusted real estate agent.
What Affects Home Affordability? Final Words: Guiding Light in Real Estate
In the complex landscape of real estate, understanding the dynamics of mortgage rates, home prices, and wages is crucial. As Leslie Rouda Smith, President of the National Association of Realtors (NAR), wisely advises: “Buying or selling a home involves a series of requirements and variables, and it’s important to have someone in your corner from start to finish to make the process as smooth as possible… and objectivity to deliver trusted expertise to consumers in every U.S. ZIP code.”
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