Real Estate Affordability: Why a housing crash isn't a sure thing

These days, there's one thing most people will agree on: it's more expensive to buy a house. 🥵

Put another way, people would say home affordability is at all-time lows given relatively high rates and house prices.

But is it the worst its ever been? Let's take a look..👀

More Expensive House Payments

The graphic above is from a recent article on Bankrate.

According to the note and a couple assumptions, they're taking the median home price nationally (they don't specify) and calculating the principal and interest on that price using a 20% down, 30-year fixed rate loan at the average interest rate for the year (again, they don't specify on the rate).

You can see how payments have jumped up since 2020 with the real estate boom and rise in interest rates triggered in-part by pandemic money printing. 

And it's true - the cost to purchase a home has gone up significantly compared to pre-pandemic times. 📈

In fact, we're at the same levels of affordability as 2005 when considering today's mortgage payment and people's income. 

This has many thinking another 2008-type crash is around the corner. 🫣

But if we zoom out further, we can see that using a similar type of analysis shows the payment to income ratio was 29% higher around 1980 when rates were in the teens:

An important point here is that there wasn't a 2008-like housing crash back in the 80's even as unaffordability hit an all-time high.

Instead, we saw home prices double from 1975 to 1985 (before and after the peak). 🤯 

Finding Opportunity

So, what do we do with this information? 🤔

Let's start by acknowledging that nobody knows what the future holds so we can't reasonably predict a surprising change in any market.

Also, most people scoff at looking back in time because it doesn't change the fact that they can't buy a house today.

But the main point we should consider is that it's rare for the real estate market to crash.

In fact, 2008 is the only time where nominal home prices went down significantly in modern history. 😲

Unfortunately, you get more views taking an extreme point of view rather than a rational one. 🤬😱

Rather than focusing on a potential crash, we should be paying attention to ways to create affordability in today's market as well as the potential for more affordability in the future.

✅ As sellers get flexible with buyers to make deals work, affordability might be coming in non-traditional ways like closing-cost assistance, additional repairs to the properties, and interest rate buy downs.

These don't always make it into the affordability numbers and get lost in the shuffle.

✅ Further, interest rates have declined significantly since October of 2023 and that's bringing down mortgage payments faster than home prices are rising (for now). 

Rates move faster than the affordability measures get updated so you have to keep an eye on things to stay in the know. 

✅ Lastly, income numbers, the final factor in the affordability equation, have a big lag associated with them. 

In many cases we don't see how household incomes in areas have changed until a year has gone by.

This can make homes look more unaffordable than they really are.

For example, the median household income in Florida is up 30% since 2020.

There are a lot of people who have been priced out of the market for sure.

But there are also people actively buying in the market that need expert guidance.

💡 I saw a recent post on Instagram that reinforced a big opportunity: the agent pointed out that 7 of the 9 people that bought homes so far this year started off the process thinking it wasn't even possible.

Spend this week helping people see what's possible and how they can accomplish their goals. 🚀

Dr. Alex Stewart
Founder

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