It’s no secret that home prices are appreciating at an alarming rate. While annual home appreciation since 1991 has generally remained consistent at an average of 3.8%, the third quarter of 2020 brought an appreciation rate of just over 7% compared to 2019!
Does this mean homes are LESS affordable?
Here’s the thing – the media only looks at the significant increase in median home price, which is currently up 15% versus last year. But what most people do not realize is this number does not actually measure appreciation.
Instead, it marks the MIDDLE price point of recent home sales. And because there is currently a lack of inventory for lower priced homes, there are more transactions occurring for higher priced homes. Naturally, this leads to a rise in the median home price.
However, actual home price appreciation across the United States is currently only up 5.5% to 6% compared to last year.
Now, let’s talk about home affordability. It’s true home prices play a large role in determining how affordable housing is – but another, more important factor is monthly payment which has a direct correlation to interest rate.
This is where we get to the good news. Mortgage interest rates are still holding steady at record lows. Currently, the average rate for a 30-year fixed mortgage is 2.71%. This is almost a full percentage lower than the same time last year!
Meanwhile, Americans’ average earnings are increasing. This metric is crucial to determining how affordable housing is.
Most media outlets look at hourly earnings when determining income change, but this number is not the most accurate in determining take-home pay. What happens if you earn more per hour but you are working less hours, or vice versa?
This is why we look at average WEEKLY income instead, which is currently up 5.9% year over year in the United States.
Now, we know what you’re thinking – if the appreciation rate is 7% and average weekly income is rising 5.9%, doesn’t that mean homes are LESS affordable?
This way of thinking is understandable…but fortunately, not correct. This is because only a portion of your income goes to paying your mortgage.
For example, let’s say you purchased a home in 2019 for $327,100. At an interest rate of 3.75% (the average rate for a 30-year fixed mortgage last year) and with 10% down, your monthly mortgage payment on the home would be $1,363 including mortgage insurance. If your monthly income was $5,000, this means your mortgage payment would have been 29.5% of your income.
Now, what would this situation look like if you purchased the same home in 2020?
At 7% appreciation, that $327,100 home now costs $350,000. It is true your 10% down payment has increased and so has your mortgage insurance, but at the same time your interest rate has decreased by 1%.
What does this mean for your monthly payment? Thanks to the decrease in interest rate, your payment actually dropped by $69, even though your home cost 7% more!
The best part? We haven’t even taken into account the increase in your income. If your monthly income follows the average trend and increases by 5.9%, you are now making $5,295 compared to $5,000.
Considering the decrease in monthly payment and the increase in monthly income, the home in this scenario is actually 3% MORE affordable this year than it was last year – even though home prices have appreciated by 7%!
The Bottom Line
When purchasing a home, it’s important to think about the overall cost, not just the price of the house. If you really dive into the numbers and take into account ALL of the factors that influence home affordability, you will see that housing is more affordable today even though home prices have appreciated.
If you feel ready to buy, purchasing a home this season may save you significantly over time. We would love to help you take advantage of today’s low interest rates and get a great deal on a new home. If you would like to speak with one of our mortgage advisors and start your home-buying journey, fill out the form below.
