I found it very informative and interesting, so I thought I would share the highlights, weigh in and provide a link to the original article for your viewing pleasure 🙂
Basically, the article sited studies done by Zillow and the Harvard Joint Center for Housing Studies.
Zillow looked at how interest rates and rising home prices will affect purchasing power and discovered (shocker) that waiting even one year, could cost you more money (approximately $189/month in the DC area) based on the assumption of home prices staying the same and interest rates increasing.
The Harvard Joint Center for Housing Studies looked at why first-time buyers weren’t buying even though affordability is at an all time high. They looked at 25-34 year olds who do not own a home and looked at how many earned enough to afford a median-priced home in the top metro areas. The discovery was that in 42 of the 85 metro areas, more than 50% of the renters can afford the monthly payments of owning a home if purchased with 5% down.
Here are my thoughts:
Affordability IS at an all time high, for all age groups because of the drastically low interest rates that WILL at some point increase. But for millennials, it may be their greatest opportunity to get in with very little invested and the ability to borrow money at a historically low rate.
Here is an example of how interest rates effect affordability. In 1981, the typical house payment was around 31% of a person’s income…in 2010 (even though homes are much more expensive), it comprised around 14% of individuals income. One reason is because the interest rates in 1981 were around 19%. In 2010 they were around 5%. Now the rates are around 4.25%
To illustrate the affect interest rate has on affordability, here is an example:
- Home Price: $400,000
- 5% Down: $20,000
- Loan Amount: $380,000
- Monthly Payment with a 4% Interest Rate @ 30years: $1814.18 (principal and interest only)
Scenario 1: Home prices decline 5% but there is a 1% rate increase
- Home Price (same home): $380,000
- 5% Down: $19,000
- Loan Amount: $361,000
- Monthly payment with a 5% Interest Rate @ 30years: $1,937.93 (principal and interest only)…this is a monthly increase of $123.75
Scenario 2: Home prices increase 5% (which is +/- the current rate of appreciation depending on the area) and there is a 1% rate increase as well
- Home Price (same home): $420,000
- 5% Down: $21,000
- Loan Amount: $399,000
- Monthly Payment with a 5% Interest Rate @ 30 years: $2141.92 (principal and interest only)…this is a monthly increase of $327.74
We live in the monthly payment, because realistically, most of us do not keep our homes for 30 years. So really the monthly payment and, more importantly, the interest rate will affect us much more than the total home price in terms of affordability. Don’t let marginal price differences cloud this reality.
Of course now may not be an option for some, and everyone needs to evaluate where they are financially and personally and determine what works best for them. Simply put, for those who are in a financial and personal position where buying makes sense, now is one of the best times to jump in…and simply waiting due to fear or hoping prices will drop, may not be the best over-all financial decision.
Hope this was helpful and please feel free to reach out with any questions!