The media continues to spread doom and gloom about the housing market, reporting that a bubble may be ahead as demand wanes due to rising rates and rising prices. However, a look at recent data shows that demand remains strong, and that there’s more to the affordability picture than meets the eye. Let’s break this down in detail.
First, New Home Sales were up 10.7% from April to May, which was much stronger than expectations. This report measures signed contract on new homes, which make up about 10% of the housing market overall. It’s a pretty real-time indicator of demand for new homes, as it reflects people shopping for homes and actually signing contracts in the given month.
In addition, Pending Home Sales were up 0.7% in May, which was a nice upside beat as expectations were for around a 4% decline. This report is even more important because it reflects signed contracts on existing homes, which make up about 90% of the housing market.
Both of these reports reflect buyers shopping for homes in May, during a time that factors in much of the rise in rates that we’ve seen this year. With home prices around 20% higher than they were a year ago and low inventory still a reality across the country, this data shows that the demand to purchase a home remains strong despite all the hurdles buyers are facing.
Another big topic the media has been discussing is affordability. Given higher home prices and higher mortgage rates, some in the media are reporting that on average, the median mortgage payment is up $800 a month.
But let’s look more closely, as this doesn’t factor in the whole picture. Yes, homes are more expensive. Yes, mortgage payments are higher. But are things as bad as the media is portraying?
Comparing affordability from last year to this year: In 2021, if you had a $400,000 loan amount with a rate of 3.5%, your monthly principal and interest payment would have been $1,796. And on average to qualify for this, you’d need to have around $9,000 in monthly income.
Now, let’s say home prices have risen 18% over the last year. By 2022, that same loan would be $472,000. We know rates are around 6% today, or around 2.5% higher than last year, so that new monthly payment would now equal $2,830 – or $1,034 a month more expensive than a year ago.
In addition, inflation has also added to monthly expenses, with the average consumer spending about $79 more a month for food, $71 more for gasoline and $73 for services. All in all, that equals $1,257 more in monthly expenses this year compared to a year ago.
However, one thing the media typically fails to mention is household income, which in the private sector has risen by around 8%. This means that monthly income in our example has increased from $9,000 last year to $9,720 this year.
So, while it’s true that affordability has worsened, the rise in income does help mitigate some of the increase in costs. In addition, homes are still forecasted to appreciate in the high single digits over the next year and rents continue to rise at a record pace, as CoreLogic’s Single-family Rent Index showed that rents experienced their thirteenth consecutive month of record-breaking annual gains in April.
Considering all of this data, housing still remains a good investment – despite what the media often reports.
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