The 3 Factors That Affect Home Affordability
If you've been following the housing market in recent years, you've probably heard about rising affordability issues. However, experts predict that the key factors determining housing affordability will improve this year. CoreLogic's Executive, Deputy Chief Economist, Selma Hepp, explains:
“. . . with slowly improving affordability and a more optimistic economic outlook than previously believed, the housing market could show resilience in 2023.”
Home prices, mortgage rates, and wages are the three factors used to determine home affordability. Each one is examined in greater detail below.
1. Mortgage Interest Rates
Mortgage rates rose above 7% last year, causing many buyers to postpone their purchases. However, things are changing as interest rates begin to fall. According to George Ratiu, Senior Economist at realtor.com:
“Let’s celebrate some good news. . . . mortgage rates are down. With inflation showing a tangible slowdown, I do expect mortgage rates to follow suit in the months ahead.”
Even minor changes in interest rates can have an impact on your purchasing power. This context is provided by Nadia Evangelou, Director of Forecasting for the National Association of Realtors (NAR):
“With a 6% rate instead of 7%, buyers pay about $2,700 less every year on their mortgage. As a result, owning a home becomes affordable to about 1.4 million more renters and 4.3 million more homeowners.”
If 7% interest rates put a halt to your homebuying plans last year, this could be the opportunity you've been waiting for. Work with a team of experts who are up to date on mortgage rates and can provide you with the best advice for the current market.
2. Home Values
The second factor to consider is home prices. Home prices have been in the news recently because they skyrocketed during the pandemic. When discussing home prices in 2023, NAR Chief Economist Lawrence Yun says:
“After a big boom over the past two years, there will essentially be no change nationally . . . Half of the country may experience small price gains, while the other half may see slight price declines.”
As a result, while prices in some markets are likely to remain flat this year, others may see small gains or slight declines. It all depends on where you live. Reach out to a trusted real estate professional for insight into what's going on in your market and how prices are affecting affordability.
Wages are the final factor in the affordability equation. The graph below shows how wages have increased over time using data from the Bureau of Labor Statistics (BLS):
When considering affordability, keep in mind that the big picture includes more than just mortgage rates and prices. Wages must also be considered. As wages have risen, many buyers have found new opportunities in the market.
While affordability challenges will not be completely eliminated this year, based on current trends and projections, 2023 should provide some relief to homebuyers who have faced increasing difficulties. According to Mike Fratantoni, Chief Economist for the Mortgage Bankers Association (MBA),
“Rates are expected to move lower for the year, and home price growth is expected to cool, both of which will help affordability challenges.”
If you have any questions, contact a reputable real estate agent to discuss your options. You might be closer to homeownership than you think.
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