The trials of last year put an emphasis on the importance of one’s home. As a result, we are witnessing an increase of individuals who are looking to move. We are seeing an influx of renters jumping into homeownership and also current homeowners who are re-evaluating their house and considering transitioning into one that is a better fit to their lifestyle. If you are looking to make a move in the market, it is important to understand how housing affordability works. The main market factors that impact housing affordability and those who are ready to buy a home, narrow down the optimal window of opportunity to make a purchase.
There are three main factors that determine home affordability for potential buyers:
- Mortgage Rates
- Mortgage Payments as a Percentage of Income
- Home Prices
The National Association of Realtors (NAR) produces a Housing Affordability Index. It takes these three factors into account and determines an overall affordability score for housing. According to NAR, the index:
“…measures whether or not a typical family earns enough income to qualify for a mortgage loan on a typical home at the national and regional levels based on the most recent price and income data.”
The NAR also reports the higher the index, the more affordable it is to purchase a home. Here’s a graph of the index going back to 1990:
The blue bar represents today’s affordability. The homes show to be more affordable now than they’ve been at any point since the housing crash. During the recession, we witnessed distressed properties (foreclosures and short sales) dominate the market. These properties were sold at large discounts that have not been seen before in the housing market for almost one hundred years.
Why are homes so affordable today?
Although there are three factors that drive the overall equation, one that plays a significant part in today’s home buying affordability, is historically low mortgage rates. Based on this factor, we see that it’s more affordable to buy a home today than it has been in the past. If you’re considering purchasing your first home or moving up into your dream home, it’s important to understand how affordability plays into the overall cost. Buying while mortgage rates are historically low will save you money over the life of your home loan.
