Beyond the Price Tag: Understanding the Factors That Impact Home Affordability

Recently, there has been a great deal of attention on the impact of higher mortgage rates and how they may be posing affordability challenges for those seeking to buy a home. While it's true that rates have increased significantly since hitting a record low during the pandemic, it's essential to recognize that home affordability is determined by more than just mortgage rates alone. Rather, it's a combination of various factors, including mortgage rates, home prices, and wages.

In order to obtain a comprehensive understanding of home affordability in the current market, it's important to consider how each of these factors is changing. Here is the latest information on this topic.

1. Mortgage Rates

While mortgage rates are higher than they were a year ago, they’ve hovered primarily between 6% and 7% for nearly eight months now (see graph below):

As depicted in the graph, mortgage rates have exhibited a degree of instability over the past few years. It's worth noting that even a slight shift in mortgage rates can have a significant impact on your purchasing power. As a result, it's vital to rely on the guidance of real estate professionals who possess expert knowledge and can provide insights into the current state of the market.

While it's difficult to predict the future direction of mortgage rates, many experts predict that they will remain steady at around 6% to 7% in the near term. By keeping yourself informed and seeking guidance from professionals, you can make informed decisions and stay on top of any developments in the market.

2. Home Prices

In recent years, home prices have experienced a significant increase due to the surge in buyer demand that occurred during the pandemic, fueled by the record-low mortgage rates. This demand, combined with a shortage of homes for sale, resulted in a supply-demand imbalance that led to upward pressure on home prices. However, the higher mortgage rates seen today have had the effect of slowing down price appreciation.

It's worth noting that the extent of home price appreciation varies by market. While some regions have experienced slight declines in home prices, others have seen significant growth. By keeping track of local market trends and conditions, you can make informed decisions about buying or selling a home. As Selma Hepp, Chief Economist at CoreLogic, explains:

“The divergence in home price changes across the U.S. reflects a tale of two housing markets. Declines in the West are due to the tech industry slowdown and a severe lack of affordability after decades of undersupply. The consistent gains in the Southeast and South reflect strong job markets, in-migration patterns and relative affordability due to new home construction.”

To find out what’s happening with prices in your local market, reach out to a trusted real estate agent.

3. Wages

The most positive factor in affordability right now is rising income. The graph below uses data from the Bureau of Labor Statistics (BLS) to show how wages have grown over time: 

Another factor that influences home affordability is wages. Higher wages can improve affordability by reducing the percentage of your income that goes towards paying your mortgage. This means that you don't have to allocate as much of your paycheck towards your monthly housing costs, making it easier to afford a home.

In summary, home affordability is impacted by a combination of mortgage rates, home prices, and wages. By staying informed and seeking expert advice from real estate professionals, you can gain a better understanding of how these factors work together and make informed decisions about buying or selling a home.

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