Are Home Prices Affordable?

Price and affordability are different concepts. Even if you have the money to pay the cost of an item, the value achieved might not be enough to say that the item was affordable. Likewise, you might stretch your bank account to pay for an item whose value so far exceeds the price that it can actually be considered an affordable purchase. The difference between affordability and price really comes down to value, which makes sense in the abstract. When you apply those concepts to the real estate market, things can get confusing. Even though home prices are rising, are they still affordable for home buyers? The truth is that the answer to that question depends on your own financial situation. Determining if buying a house is truly affordable comes down to a number of factors and the team at Peoples Choies Mortgage is here to break them down. 

3 Components of Home Buyer Affordability

The decision to buy a house is unique to every home buyer. As Shawn Hendricks Jr., Senior Loan Officer with Peoples Choice Mortgage, will tell you, “It’s all about the numbers.” By that, Shawn means that every home buyer needs to speak with a mortgage professional to get the real numbers behind their decision. Home price is only a small component of deciding whether or not a home buyer can truly afford their home loan. It is also important to look at other factors such as mortgage rates and income. 

1. Home Prices

We often talk about how home prices are not everything when it comes to home buying decisions, but they are very important. It is no secret that home prices have been rising over the past few years. Homeowners have been benefiting from these trends. In one year, from January 2021 through January 2022, home values increased by over 19 percent. Rising home prices do impact affordability. As home prices increase, home buyers will be forced to take out larger mortgages to buy them, which could increase monthly payments. 

One of the biggest questions home buyers should ask themselves before buying a house is whether monthly payments are affordable. Ideally, you should be spending no more than 30 percent of your monthly income on housing. If home prices rise too much, monthly payments could become unaffordable. This is a good incentive for those who can afford today’s home prices to buy now before mortgage payments become too high down the road as home prices continue to rise. 

2. Mortgage Rates

Today’s mortgage rates have moved up to their highest point in the past three years. However, when placed in context to mortgage rates over the past few decades, they are still near historically low levels. Mortgage rates are an important component to the equation of affordability. Lower mortgage rates mean smaller monthly payments and less interest paid over the life of your home loan. Unfortunately, uncertainty over the war between Russia and Ukraine, inflation, and the pandemic, there is uncertainty about the Federal Reserve’s approach. What they decide to do with interest rates will set the stage for what happens next with mortgage rates. 

3. Wages

If you do not have the income to support monthly mortgage payments, then you cannot afford to buy a house. For that reason, your wages play a large role in determining how affordable buying a house is at the current moment. The good news is recent data indicates that median American income is higher than the income needed for a median home loan. Many are concerned with the impact of wages on the economy. But, as long as wages can keep ahead of inflation and ahead of mortgage payments, then the future will remain bright for home buyers. 

Final Thoughts

If you are struggling with whether you can afford to buy a home right now, the best thing that you can do is take Shawn’s advice and let the numbers guide you. The decision to buy a house is never made in a vacuum. You need to look at the price of the home, the mortgage rates you are offered, and your income. From there, you will have a much better idea of whether you should buy a house right now or prepare more for the future. 

If you want help getting those numbers together so that you can make a good decision, contact us. The mortgage professionals at Peoples Choice Mortgage will look at your unique financial situation. From there, we can see if there is a home loan that makes sense for your budget and your needs. You should not have to stretch to afford a house. Find a house and a mortgage that works for you.