Homes are more affordable than ever!

Real Estate

Myth - Homes Are Less Affordable

Truth - Homes Are More Affordable Today

There’s a current 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 substantially increased over the last several years. However, this is due to bounce back from the recession of 2008. Prices have, for the most part, recovered to what they would have been if the market had a steady upward trajectory between 2003 until now.

The forecast for the future is that home prices will continue to rise at a slower rate, about 2% in 2020.  That may not sound too exciting but let's just look at the numbers. For our example we will use a house that is $549,000. You, as the buyer, fall in love and happily purchase this home for 10% down or $54,900 down. After one year, since the increase of home prices has slowed to 2%, your home has appreciated by $11,000. Which equals a return of just over 20% on your $54,900.  Holy cow! And you had a home to live in! So let's look 5 years down the road. Let's pretend prices continue their steady, modest increase of 2% (the average increase is 5% according to Zillow) and your home is now worth $606,158. Holy cow again! That is almost a 105% return on your original investment of $54,900. Such is the power of real estate. 

But what about the interest you are paying on your mortgage, you ask. How does that fit into the above narrative and equation? I'm not a tax expert but the current tax code says you can deduct all interest paid on mortgages up $750,000.

It’s not just the price of a home that matters.

Your buying power has increased!

Homes, in most cases, are purchased with a mortgage. The current mortgage rate is a major component of the affordability equation. Mortgage rates have fallen by over a full percentage point since December 2018. Another major piece of the affordability equation is a buyer’s income. The median family income has risen by approximately 3% over the last year.

The California Association of Realtors (CAR) releases a quarterly Housing Affordability Index. The latest index shows that home affordability is better today than at almost any point over the last 30 years. The index indicates an upward trend.

CAR affordable housing index

All in all, investing in a home, whether a first home, vacation home, or investment home

 

Bottom Line
All in all, if you are investing in a home, whether a first home, vacation home, or investment property, don’t let the false narrative about affordability prevent you from moving forward. From an affordability standpoint, this is one of the best times to buy in the last 30 years.