Housing inventory is still at an all-time low. Realtor.com recently reported that there are 39% fewer homes for sale today than there were last year. At the same time, buyer demand remains strong. Whenever there’s a shortage in the supply of an item that’s in high demand, the price of that item increases. That’s exactly what’s happening in the real estate market right now. As a result, home values are surging.
This is great news for clients who are planning to sell their house. On the other hand, to first-time or even repeat buyers, this can be troubling news. Purchasers, however, should realize that the price of a house is not as important as the monthly cost.
There are several factors that influence the cost of a home however two of the major ones are:
- The price of the home
- The mortgage rate at which a buyer can borrow the funds necessary to purchase the home
How do these Factors Impact Affordability?
The National Association of Realtors (NAR) produces a Housing Affordability Index which takes these factors into account and determines an overall affordability score for housing. According to the most recent report reflecting October of 2020, affordability has slightly declined, although still remains an option for some. The graph below demonstrates the annual changes to this index looking at the previous 30 years:
As the blue bar represents today’s affordability we can see that homes are more affordable now than they were from 1990 to 2008 as well from 2017 to 2018.
Buying a home today is just a little less affordable than it was last year, but still very affordable compared to historical housing market trends.
Explaining Affordability to Clients
The number one factor impacting today’s homebuying affordability is record-low mortgage rates. There’s no doubt that prices are on the rise, however mortgage rates have fallen dramatically in the past 12 months. Last week, Freddie Mac announced that the average interest rate for a 30-year fixed-rate mortgage was 2.71%. Last year at this time, the average rate was 3.73%.
If a client is considering purchasing their first home or moving up to the one they’ve always hoped for, it’s important to help them understand how affordability plays into the overall cost of a home. With that in mind, buying while mortgage rates are as low as they are now may save quite a bit of money over the life of a home loan.
At this point, home purchase affordability is still in a historically good place given low mortgage rates. However, we need to watch price increases going forward. As Mark Fleming, Chief Economist at First American, noted in a recent post:
“Faster nominal house price appreciation can erode, or even eliminate, the boost in affordability from lower mortgage rates, especially if household income growth doesn’t keep up.”