It seems you can’t find a headline with the term “housing affordability” without the word “crisis” attached to it. That’s because some only consider the fact that residential real estate prices have continued to appreciate. However, we must realize it’s not just the price of a home that matters, but the price relative to a purchaser’s buying power.
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 3.5% over the last year.
Let’s look at three different reports issued recently that reveal how homes are very affordable in comparison to historic numbers, and how they have become even more affordable over the past several months.
Here is a graph showing the index going all the way back to 1990. The higher the column, the more affordable homes are:We can see that homes are less affordable today (the green bar) than they were during the housing crash (the red bars). This was when distressed properties like foreclosures and short sales saturated the market and sold for massive discounts. However, homes are more affordable today than at any time from 1990 to 2008.
NAR’s report on the index also shows that the percentage of a family’s income needed for a mortgage payment (16.5%) is dramatically lower than last year and is well below the historic norm of 21.2%.
This report reveals that as a result of falling interest rates and slowing home price appreciation, affordability is the best it has been in 18 months. Black Knight Data & Analytics President Ben Graboske explains:
“For much of the past year and a half, affordability pressures have put a damper on home price appreciation. Indeed, the rate of annual home price growth has declined for 15 consecutive months. More recently, declining 30-year fixed interest rates have helped to ease some of those pressures, improving the affordability outlook considerably…And despite the average home price rising by more than $12K since November, today’s lower fixed interest rates have worked out to a $108 lower monthly payment…Lower rates have also increased the buying power for prospective homebuyers looking to purchase the average-priced home by the equivalent of 15%.”
While affordability has increased recently, Mark Fleming, First American’s Chief Economist explains:
“If the 30-year, fixed-rate mortgage declines just a fraction more, consumer house-buying power would reach its highest level in almost 20 years.”
Fleming goes on to say that the gains in affordability are about mortgage rates and the increase in family incomes:
“Average nominal household incomes are nearly 57 percent higher today than in January 2000. Record income levels combined with mortgage rates near historic lows mean consumer house-buying power is more than 150 percent greater today than it was in January 2000.”
If you’ve put off the purchase of a first home or a move-up home because of affordability concerns, you should take another look at your ability to purchase in today’s market. You may be pleasantly surprised!
You're about to buy a home, and are now "in escrow," the homestretch of the home-sale process. During this period, you as the buyer will provide the needed funds for the home (most likely from your lender and with your down payment), the owner will transfer ownership of the property and the sale will be finalized.
Which means that if everything goes right -- all contingencies are met, both the seller and the buyer meet their contractual obligations and your financing to purchase the home is in place -- the home you have been aiming to buy will soon be yours.
But even though closing day is just around the corner, you're not out of the woods yet. There are several missteps a home buyer can take that will put getting a loan, and finalizing the transaction, at risk. Read on to avoid these goofs:
Going on vacation or becoming hard to reach while in escrow is not a good idea, especially if your lender needs to get in touch with you to process your loan. Any glitches in that process can push back the closing date for your home. For the same reason, it's not a good idea to change your cell-phone number right now. It's best that you keep in touch with all necessary people while you are working to close on the property.
When you're looking to close escrow and take possession of a home, you don't want to make your lender uneasy. Changing jobs (or going solo/self-employed) during this time period could certainly make a lender queasy and lead that lender to question whether you'll be able to afford that home. Lenders prefer a steady and consistent job history. If you make a job switch just before closing on a home, it could put everything on hold while your lender re-evaluates your financial position.
You're about to get a new house, so why not whip out your credit cards and buy a new washer/dryer, dishwasher and refrigerator...or maybe, take out a loan for a new car for your new driveway?
Because these big purchases (and taking on more debt) will throw off what's called your "debt to income ratio" (which measures how much of your monthly income goes toward debt obligations), a ratio lenders consider when evaluating a loan application. You don't want to end up buying items for a home you don't have -- one that you lost because you nixed your chances of securing that mortgage before it went through.
You might even run into trouble if you pay for these items with cash -- lenders look at how much cash reserves you have when approving a mortgage. And don't think you're off the hook if you lease a car instead of purchasing one -- leasing a new car at this time could jeopardize your standing with your lender as well.
Instead, try to keep the balances on your credit cards low and don't take on new debt (this includes co-signing on a loan) until after you close on your home.
If you're about to close on your home, stay current on your bills -- you don't want to wreck your credit score just before your loan goes through. Any changes to your credit status could affect the likelihood of closing on your new home, so you want to keep your credit good -- at least until you close on your home.
Opening up new credit cards or closing old ones just before closing on your new home could negatively affect your credit status, so again, wait until making such moves until your mortgage is secure.
Before that home is definitely yours, don't transfer large amounts into your checking or savings accounts -- check with your mortgage company before doing so. If they see large amounts of money moving around, they may wonder why and raise the red flag. (E.g., they may think you've secured another loan and have more debt obligations than you did when initially applying for the loan.) Again, you don't want anything to delay or hold up your closing.