I’m sure saying the real estate market has been a bit crazy the past few months wouldn’t come as a surprise to anyone but has it become unaffordable? It's a question many potential buyers are asking. After all, prices have been going up for what feels like daily, bidding wars have become the new normal, and we seem to be playing a game that doesn’t have any rules.

I spoke to a couple last week who have decided to put their home search on hold, after casually looking at homes for the past 6 months, because they felt homes had just become too expensive. They’re not the first that have come to that conclusion and won’t be the last.

In this week’s blog post I take a deeper dive into the question of home affordability and share some interesting numbers going back to 1990 for perspective. Watch the following video, or continue reading below, to learn more.

The real estate market feels like its been crazy forever, but the craziness didn’t actually begin until February of this year. While the market was certainly active in the second half of 2020, the bidding wars and rapidly escalating prices started in earnest in February.

There are two main components when talking about housing affordability and whether homes are too expensive - the price of the house and the monthly mortgage payment. While record-low mortgage rates have helped partially offset rapidly rising home prices, average mortgage payments have also been on the rise as shown on the following graph;

While falling mortgage rates were able to offset home price gains in 2020, average monthly mortgage payments have been increasing since February, when home prices started appreciating faster due to widespread bidding wars.

* (average mortgage payments represent the monthly mortgage on a median-priced home assuming 20% down conventional financing)

As monthly mortgage payments and home prices have been rising it follows that home affordability is decreasing;

To explain, the higher the number, the more affordable housing is considered to be. We can see that since March, housing affordability has been falling and I expect we will see that trend continue when July’s numbers are released.

With monthly mortgage payments increasing, and housing affordability decreasing, can we assume that housing is unaffordable? The answer to that question really depends on what, or when, you are comparing current conditions to;

Housing is now less affordable than any year since 2015 and much less affordable than what we experienced during the crash years (represented by the orange bars) when the market was dominated by distressed properties. (Before you ask, no, I don’t think we are going to see a repeat of 2008 anytime soon. Check out this blog post if you’d like to know why.)

However, when you look further back you will see that housing is currently more affordable than any year between 1990 and the crash in 2008;

The graph above is from April so the “today” affordability number is actually 146, not 158, but clearly shows how we currently stand compared to between 1990 - 2008.

We know that home prices and mortgage payments are going up, but when will we know if they’ve risen too much to be considered unaffordable? One way is by looking at the percentage of gross income being spent on housing costs.

Here are the guidelines from both Fannie Mae and the National Association of Realtors;

While Fannie Mae’s lending guidelines say housing expenses shouldn’t exceed 28% of gross monthly income, the National Association of Realtors guidance says 30%, but also includes utilities and maintenance expenses.

So how does that compare to where we stand currently?

Based on the most recent projections from Zillow, it is estimated the percentage could reach 23% by the end of the year. Slightly above the historical average, but still below lending guidelines.

Bottom Line

There is no doubt homes have become more expensive and are less affordable than at any time since the housing crash, but if renting is the alternative keep in mind that rent has also been increasing. In many areas, rent appreciation has outpaced home price appreciation and the same Zillow report I referenced above projects that by the end of the year the average renter will spend 30% of their gross monthly income on rent compared to 23% for a mortgage.

I share this information not to suggest you should buy now, only you can make that decision, but to provide perspective and the information necessary for you to make the best decision for you and your family.

Have questions? Schedule a free, no-obligation call with me now.