Factors That Influence Affordability

Lately, you can’t discuss residential real estate without commenting on the affordability challenges that today’s consumers face. There’s no question that properties in El Dorado Hills and other areas are much less affordable today than they were over the past few years, but that doesn’t imply homes are now truly unaffordable. There are 3 factors used to establish home affordability which includes home prices, loan rates, and wages. Here is a closer look at those components.

Home Prices

The latest Home Price Insights report provided by CoreLogic shows that home values have increased by 22% from last March of 2021 to our current month (March 2022). This is one reason affordability has declined over the past year.

Mortgage Rates

While the current global uncertainty makes it difficult to project home loan rates, we do know current rates are almost one full percentage point higher than they were at this time last year. According to Freddie Mac, the average rate for last February was 2.81% whereas this February it was 3.76%. That increase in the mortgage rate also contributes to homes being less affordable than they were last year.

Wages

The one big and positive component within the affordability equation is a rise in American wages. In a recent article by RealtyTrac, Peter Miller addresses that point:

“Prices are up, but what about wages? ADP reports that jobholder incomes increased 5.9% last year but rose 8.0% for those who switched employers. In effect, some of the higher cost to buy a home has been offset by more cash income.”

The National Association of Realtors (NAR) also recently released some data that examines income and affordability. The NAR report provides a comparison of the current median family income versus the qualifying income for a median-priced home in each region of the country. While the figures might range in certain locations within each region, it’s important to note that it was found that in most of the country, homes are still affordable.

In the end, when you think about affordability you must remember that the picture includes more than just home prices and mortgage rates. While they do have a significant impact, wages need to be factored into affordability as well. Because wages have been rising, they’re a big reason that, while less affordable a few years ago, homes are not unaffordable today.