3 Crucial Factors Shaping Affordability in Today's Market

In the last year, extensive discussions have revolved around the issue of housing affordability and its increasing challenges. However, a recent development offers a glimmer of relief, as mortgage rates have declined since reaching their highest point in October. It's crucial to recognize that the ability to afford a home encompasses more than just fluctuations in mortgage rates.

To gain a comprehensive understanding of home affordability, it's essential to consider the interplay of three crucial elements: mortgage rates, home prices, and wages. Let's delve into the most recent data for each factor to elucidate why there is an improvement in affordability.

1. Mortgage Rates

In the past few months, there has been a decrease in mortgage rates. Looking ahead, the consensus among most experts is an anticipation of further declines throughout the year. Economist Jiayi Xu from Realtor.com provides insights:

"While there might be occasional variations in the trajectory ahead, the prevailing anticipation is that mortgage rates will persist in a downward trend, contingent upon the ongoing economic progress in addressing inflation."

Even a slight alteration in mortgage rates can significantly influence your purchasing power, simplifying your ability to afford the desired home through a reduction in your monthly mortgage payment.

2. Home Prices

The second critical factor involves home prices. Following a reasonably steady increase last year, they are anticipated to continue a moderate upward trajectory in 2024. This is due to the fact that, despite a projected slight growth in inventory this year, the available homes for sale still fall short of meeting the demand from prospective buyers. According to Lisa Sturtevant, Chief Economist at Bright MLS:

"The increase in inventory is likely to be counterbalanced by a rise in the number of buyers entering the market. Consequently, the overall expectation is for a modest growth in the median home price in the U.S..."

This is positive news for you, suggesting that prices are unlikely to experience a sudden surge as witnessed during the pandemic. However, it also implies that delaying your purchase might result in higher costs. Therefore, if you are prepared, eager, and financially capable to buy, securing a home before additional buyers enter the market and prices escalate further could be advantageous for you.

3. Wages

An additional contributing factor to current affordability is the increase in income. The chart below utilizes data from the Federal Reserve to illustrate the growth of wages over time:

Observing the blue dotted line, you can note the usual pace of wage growth. Yet, on the right side of the graph, current wages exceed this line, signifying a higher-than-normal growth rate.

Increased wages enhance affordability by lowering the percentage of your income required to cover your mortgage. This is because a larger income means you don't have to allocate as much of your paycheck towards your monthly housing expenses.

What This Means for You

Affordability in the housing market hinges on three factors: mortgage rates, home prices, and wages. The encouraging news is that, on the whole, these elements are trending favorably for prospective buyers.

Bottom Line

For those contemplating a home purchase, it's crucial to be aware that the key factors influencing affordability are on an upward trajectory. Stay informed on the latest developments in each aspect by reaching out to a reliable real estate agent.