Real estate prices across the country have increased dramatically in the past year. With increases in the 10-12% range, many potential homebuyers have given up and decided that homes are just too expensive to consider.
While homes have become more expensive, it does not mean they are unaffordable. Would you believe that we are experiencing a historically favorable market for buyers when it comes to affordability? Why? This is because affordability involves more than just the purchase price of the home. When considering whether you can afford a home, you must include wage growth and interest rates. Interest rates are among the lowest we’ve seen in decades. Although they saw a small increase in 2020, they are hovering in the high 2% to low 3% range this year. When you compare that to the 5% interest rate we saw in 2018, buyers have unprecedented buying power. In addition, wages are increasing at a staggering 7% rate year-over-year. For example, a median household income of $68,000/year with a 7% wage growth, will see an extra $400/month. The median home price in the US is about $325,000 (obviously higher in CA). If we add a 10% growth factor to this, that same home would sell for $357,500. At a 3.5% interest rate, the monthly payment would increase from $1313/month to $1444/month, an increase of only $131/month. In terms of affordability, today’s market offers homebuyers more for their money.
Many homebuyers today indeed have sticker shock; homes are getting more expensive. But for the savvy homebuyer, it is about those other economic factors that really determine the affordability of a home, and for now, homes are still, most definitely, affordable.