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Houses Are More Affordable Currently, Not Less Affordable

There is a present day narrative that owning a home today is less affordable than it has been in the past. The reason some are making this claim is because house prices have considerably increased over the last several years.

It’s not, however, just the price of a home that is important. Homes, in most circumstances, are purchased with a mortgage. The current mortgage rate is a major factor of the affordability equation. Mortgage rates have decreased by over a full percentage point since December 2018. Another major component of the affordability equation is a buyer’s income. The average family income has risen by approximately 3% over the last year.

The National Association of Realtors (NAR) distributes a monthly Housing Affordability Index. The latest index exhibits that home affordability is better today than at almost any point over the last 30 years. The index determines how affordable houses are based on the following:

“A Home Affordability Index value of 100 means that a family with the median income has exactly enough income to qualify for a mortgage on a median-priced home. An index of 120 signifies that a family earning the median income has 20 percent more than the level of income needed pay the mortgage on a median-priced home, assuming a 20 percent down payment so that the monthly payment and interest will not exceed 25 percent of this level of income (qualifying income).”

The higher the index, consequently, the more affordable homes are. Here is a graph showing the index since 1990:

Undoubtedly, affordability was better during the housing crash when distraught properties – short sales and foreclosures – sold at considerable discounts (2009-2015). Apart from that period, however, houses are more affordable today than any other year since 1990, with 2016 being the exception.

The report on the index also encompasses a category that calculates the mortgage payment on a median priced house as a percentage of the average national income. Historically, that percentage is just over 21%. Below are the percentages since June of 2018:

Once more, we can observe that affordability is much better today than the historical average, and has been improving over the past year and a half.

In Conclusion

Whether you are considering purchasing your first home or upgrading to the house of your dreams, don’t let the incorrect narrative about affordability stop you from moving forward. From an affordability standpoint and looking at the last 30 years, this is currently one of the prime times to buy a home.

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