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September 28, 2021

A Deeper Look at Affordability

Rising prices and bidding wars are leading some buyers to question affordability. Here’s what the data says.

The 2021 U.S. Home Affordability Report from ATTOM Data explains that the major ownership costs (on the typical home) as a percent of the average national wage increased from 22.2% in the second quarter of 2020 to 25.2% in the second quarter of this year. That means homeowners today are contributing a slightly higher percentage of their total income to their monthly mortgage payments than they did last year, but this shouldn’t be a major cause for concern:

“Still, the latest level is within the 28 percent standard lenders prefer for how much homeowners should spend on mortgage payments, home insurance, and property taxes.”

It’s true that monthly mortgage payments are greater than they were a year ago (as the ATTOM data shows), but they’re not unaffordable when compared to the last 30 years. While payments have increased dramatically during that several-decade span, if we adjust for inflation, today’s mortgage payments are 10.7% lower than they were in 1990.

What does that mean for you? While you may not get the homebuying deal someone you know got last year, that doesn’t mean you shouldn’t still buy a home. Here are your alternatives to buying and the trade-offs you’ll have with each one.

Alternative 1:

I’ll rent instead.

Some may consider renting as the better option. However, the monthly cost of renting a home is skyrocketing. According to the latest National Rent Report from Apartment List:

“The first half of 2021 has seen the fastest growth in rent prices since the start of our estimates in 2017. Our national rent index has increased by 11.4 percent since January.”

If you continue to rent, your monthly payments will keep increasing at a very rapid pace. That means you’ll end up spending significantly more of your income on your rental as time goes on, which can make it even harder to save for a home.

Alternative 2:

I’ll wait it out.

Others may consider waiting for another year in hopes that purchasing a home will be less expensive by then. Let’s look at that possibility. A lower monthly payment will require one of those two elements to decrease over the next year. However, experts are forecasting the exact opposite:

  • Freddie Mac projects mortgage rates will be at 3.8% by the end of 2022.
  • The Home Price Expectation Survey (HPES), a survey of over 100 economists, investment strategists, and housing market analysts, calls for home prices to increase by 5.12% in 2022.

Based on these projections, let’s see the possible impact on a monthly mortgage payment:

Home Purchase Date Cost of Home* 10% Down Payment Mortgage Amount Mortgage Rate** Monthly Payment***
Today
$350,000
$35,000
$315,000
2.86%
$1,304
Next Year
$367,920
$36,792
$331,128
3.8%
$1,543
Difference
$17,920
$1,792
$16,128
0.94%
$239
*Increase in value based on 5.12% price growth as forecast by the Home Price Expectation Survey
**Freddie Mac’s current rate and forecast for Q4 2022
***Principal and interest only

By waiting until next year, you’ll potentially pay more for the home, need a larger down payment, pay a higher mortgage rate, and pay an additional $239 a month ($2,868 a year) over the life of the loan.

Bottom Line

While you may have missed the absolute best time to buy a home, waiting any longer may not make sense. Mark Fleming, Chief Economist at First American, says it best:

“Affordability is likely to worsen before it improves, so try to buy it now, if you can find it.”

Why Rising Mortgage Rates Push Buyers off the Fence

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Work With a Real Estate Professional if You Want the Best Advice

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