How To Factor Affordability Into Home Buying

Factoring Affordability Into Home Buying

As the real estate market continues to baffle even the most accurate economists, it is safe to say that times are tough for buyers, sellers, and agents. However, after years of what seemed like endless buyer demand, the market has began to slow. This allows for clients to spend more time looking and searching around, instead of feeling pressure to make an offer on the first house. While the market has changed, likely for the better, the reason for the change is not optimal for buyers or sellers. Affordability is brought up a lot when discussing the shift in the housing market, and it perfectly describes this shift. Here is how to factor affordability into home buying.

Mortgage Rates And Taking Affordability Into Home Buying

The first, and likely most obvious reason that we have seen a shift in the market due to affordability is mortgage rates. See, when we factor affordability into home buying, this is closely watched as the key factor. For those who were able to barely qualify for mortgages in 2021 at record low mortgage rates, they likely wouldn’t qualify now. This is because as mortgage rates increase by even just 1%, your monthly payment can increase by up to 10-15%.

However, we did not see a 1% rise in rates, we saw close to a 5% increase at the peak. This means that a mortgage payment now on the exact same house at the same price would cost dramatically more. Factoring affordability into home buying becomes a bigger focus when mortgage rates are high. So, for those looking to buy now, remember, you will likely be able to afford less house just based on mortgage rates alone. However, mortgage rates are not the only factor to consider when discussing affordability and home buying.

Prices And Affordability

The next important, and also obvious, factor when talking about affordability is price. With a lower interest rate, you are able to afford more house with your money. However, with a lower interest rate, more buyers are present, pushing up demand. And according to the principle of supply and demand, when demand increases and supply doesn’t, prices increase. This is exactly what we saw in the pandemic housing boom, and what will likely be the second factor to change, following mortgage rates.

As mortgage rates have ticked up, but remain off their highs, home prices have began to decline or stagnate, depending on the market. In fact, for the first time since the beginning of the bull market after the Great Recession, we saw home prices decrease last year month over month. This shows just how volatile the real estate market can actually be in times of rate volatility. While this is a lagging indicator, it is an important aspect to focus on when debating affordability into home buying. There is one more factor to consider, and this one is often overlooked.

How Wages Impact Affordability Into Home Buying

The often overlooked, and hardly talked about third factor is wages. Now, while minimum wage remains low across the states, most people make above that nowadays. One of the biggest influences on affordability is the wages that you and your significant other (or just yourself if buying alone) bring home. While wages have steadily been increasing over the years, even as minimum wage increases lag, they really began to accelerate during the inflation spike of the past few years. Wages were jumping higher, as a tight labor market required companies to bust out the check book to retain employees they desperately needed.

Now, let us factor this into housing. Obviously, the more money you make, the more house you can afford (on paper). But, just because you make a lot of money, does not mean you can afford a lot of house. In fact, a recent study showed that even people making 6-figure salaries, lived paycheck to paycheck at an alarmingly high rate. Having a higher wage does, however, open the opportunity to being able to afford a home, even at higher rates. Often times, if you cannot afford a house on your own, it is okay to rent until you increase your income. However, there are a lot of us with no budget or accountability for their spending. If you peel back on unnecessary expenses, most people can afford a home that they did not expect.

Conclusion

While rates remain high, and home prices are still up compared to years ago, affordability looks to be increasing. As rates slowly trickle down and hover around their final resting place, more people will be able to afford homes. Especially if we see a large scale of price cuts in the future.

 

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